Expanding your business? How to set up payroll for employees
Many businesses are starting up right now and some are expanding, perhaps taking on staff where before it was just a solo operation. This is great news if your demand has increased but this also brings headaches and can actually stop people taking the plunge, as the fear of the unknown pay systems might delay your growth and in reality hinder your business as well as cause extra strain on your own time and resources. So we thought we’d share a basic check list from a payroll point of view, so that you know what’s involved should you want to take on (more) staff.
If you have any questions, feel free to give us a call on 01763 257882 (even if you are not a client, we won’t charge!)
Payroll for new starters
We are going to talk you through the basics here. As if you’ve not employed anyone before. And we’ll explain in detail the terms that you will come across when sorting out how to pay your people. So, we’ll explain…
- PAYE, RTI, EPS and FPS
- tell you how and when to set yourself up as an employer
- what questions you need to ask your new starter
- how to set up the right tax code
- how to submit your records to the tax office
So we’ll start with PAYE
You’ll be familiar with what PAYE is if you’ve been employed. Less so perhaps if you’ve not.
PAYE stands for ‘Pay As You Earn‘. Most people pay Income Tax through PAYE. This is the system an employer uses to take Income Tax and National Insurance contributions before they pay your wages or pension. Your tax code tells your employer how much to deduct. This means that what you get in your bank account has already had the tax and national insurance deducted and the employer is duty bound to send that money on your behalf to the tax and customs offices.
This is different to the tax system if you are self employed. Which as you know is self assessment. It’s possible that you could be self employed but your staff would need to be PAYE.
Unless they were contractors or genuinely self employed (working under their own direction) and most likely also working for other people part time. Feel free to discuss this with us if you are unsure as the rules have tightened up on who is eligible in this regard. You may have heard things about ‘IR35’ which relates to this. We can unscramble it for you and advise on your individual circumstances.
There is no link between the two systems – sole trader and employee PAYE schemes – in terms of having to be one or the other. For example, if you were self employed but needed to take on staff to help you full or part time, the money you pay your employee, including the tax and national insurance element, would become part of the costs you present on your sole trader/self employed accounts, which would reduce YOUR tax bill.
If your employee is not doing many hours work for you, they may not have to pay National Insurance out of their earnings. This is referred to as the Lower Earnings Limit.
For the current tax year the weekly limit is £120 per week, £520 per month
or £6,240 per year. So if your employee is earning less than this, they will not have to pay National Insurance. In fact, they would also not have to pay tax. But do register them with HMRC and get them into the system.
This complies with RTI (Real Time Information) requirements. In fact this was a key factor for qualifying for the furlough schemes over the last 18 months as you might have noticed.
RTI (Real Time Information) is the name given to a key government programme which aims to improve the way in which employers submit Pay As You Earn (PAYE) information about their employees to HM Revenue & Customs (HMRC). It makes everything more transparent and immediate.
Your first RTI submission is due on (or before) your first pay day. e.g. If you pay your employees weekly on a Friday, then your first RTI return should be sent on or before the first Friday that you make payments to employees.
Returns need to be submitted as an EPS (Employer Payment Summary) by the 19th of the month following the date your employee is paid.
Talking of RTI, it makes sense to use one of the accounts packages which includes PAYE calculations. It makes everything easier. We recommend Xero. And if you have questions we are well placed to help you as we are proud Gold Partners with Xero.
You will need to add the new employee to the payroll and tell HMRC that the employee is now working for you. This is done by including the new starter details on the Full Payment Submission (FPS) the first time that the employee is paid. Use your payroll software to send a Full Payment Submission (FPS) to tell HM Revenue and Customs (HMRC) about payments to your employees and what deductions you’ve made.
If you are interested in looking into accounts, invoicing and payroll automation, we are very happy to talk you through the latest opportunities to make your administration that much less of a headache!
We fully endorse the use of accounting software, believing in a paper free accounts function (something that would not have been imaginable even a few years ago!) and do all we can to help you spend the least amount of time possible on your financial transactions.
To this end, we have happily researched all the various applications on the market, and we can recommend how and what you could use for your specific needs and show you how to integrate them seamlessly.
If you want to sort your payroll manually to start – perhaps you aren’t currently using an accounts package, or you’d like to know the process – it all starts with the tax code. And getting it right is key. Just takes a bit of time but here’s the bare bones.
First things first…
BEFORE YOU CAN PAY ANYONE, register yourself as an employer with HMRC.
You normally need to register as an employer with HM Revenue and Customs (HMRC) when you start employing staff, or using subcontractors for construction work.
You must register even if you’re only employing yourself, for example as the only director of a limited company.
You must register before the first payday. It can take up to 5 working days to get your employer PAYE reference number. You cannot register more than 2 months before you start paying people.
If your business starts employing people on or after 6 April, you’ll get your employer PAYE reference number by 31 August.
If you need to pay an employee before you get your employer PAYE reference number, you should:
- Run payroll.
- Store the information regarding your full payment submission.
- Send a late full payment submissionto HMRC.
WHAT YOU ALSO NEED TO KNOW BEFORE YOU CAN PAY ANYONE
You may have heard of eye wateringly high ‘emergency tax’ being deducted from a new employees wages? It may have even happened to you? As you know, this can be refunded a few weeks later but can be a real issue if the employee is desperate for that first month pay cheque and find it lacking. (So most of us then!)
Using the correct tax code is very important and if your employee left that last job recently, and within the current tax year, it’s relatively simple, you can use the code on their P45. If you’ve not come across P45, this is in effect a ‘leaving statement’ of their earnings and tax during the current tax year. If they don’t have one, encourage them to contact their employers accounts/payroll department. It will save a lot of pain later! Even if they did leave under a cloud!
There are specific codes you can add to the tax code if they have a P45, but it is not from this year, ie from a previous tax year. If your employee does not have a P45, you will have to ask them to complete a new starter checklist.
This is good practice regardless of whether you have a P45 for them, and helps you start a file on each employee for ease of reference. If you are taking on a graduate, it also can help generate information for starters who have a student loan. The type of loan for example, cannot be ascertained from the P45.
Questions relating to paying staff to include in your check list for new starters.
As far as establishing which tax code to use, the employee will need to select one of three statements:
- A: ‘This is my first job since 6 April and I have not been receiving taxable Jobseeker’s Allowance, Employment and Support Allowance, taxable Incapacity Benefit, State or Occupational Pension’.
- B: ‘This is now my only job but since 6 April I have has another job or received taxable Jobseeker’s Allowance, Employment and Support Allowance or taxable Incapacity Benefit. I do not receive a State or Occupational Pension.
- C: ‘As well as my new job, I have another job or receive a State or Occupational Pension’.
- If Statement A
Use the tax code 1257L on a cumulative basis.
This gives the employee the standard tax free personal allowance of £12,570 for the 2021-22 tax year.
- If Statement B
Use the tax code 1257L on a ‘Week 1/ Month 1’ basis.
As the employee has confirmed this to be their only job, they should be entitled to the full tax free personal allowance of £12,570 for the 2021-22 year. However, as the new employer has not been given any details of the employee’s pay and tax from their previous employer, they are unable to calculate their tax liability on a ‘cumulative’ basis’. Instead, the 1257L code will be applied, but only by considering the proportion of the allowances and tax rate bands available to the employee for each individual pay period.
1257L on a ‘Week 1/ Month 1’ basis is then the temporary code and HMRC will often issue a revised tax code shortly afterwards. In many cases, this is simply 1257L on a cumulative basis.
- If Statement C
Use the tax code BR
As the employee has stated that they are receiving income from elsewhere, the assumption is made that they are already receiving their tax free personal allowance against that other source of income.
The BR code thus tells the new employer to collect tax at the basic rate (20%) against the employee’s full earnings.
This code should be correct if the employee is a basic rate taxpayer and all of their personal allowance for the year is being fully utilised against earnings from another employment or pension.
If this is unclear, please do get in touch. Even if you are not a client of ours. Happy to help.
Other factors to consider:
Does your employee have a student loan?
If so, you will also need to establish whether they are making student loan repayments. If they have a P45 and are making loan repayments, the student loan box will be ticked.
However, the P45 will not provide details of the type of loan. Student loan information can be provided on the new starter checklist, enabling the employer to ascertain whether the employee has a student loan, and if so what type, and also whether the employee has a post-graduate loan.
GETTING EVERYTHING SET UP PROPERLY
Registering your employee with HMRC.
- You will need to add the new employee to the payroll and tell HMRC that the employee is now working for you.
- This is done by including the new starter details on the Full Payment Submission (FPS) the first time that the employee is paid.
- Use your payroll software to send a Full Payment Submission (FPS) to tell HM Revenue and Customs (HMRC) about payments to your employees and what deductions you’ve made.
When to send in your FPS
- Send the FPS on or before your employees’ payday.
- You must enter the usual date that you pay your employees, even if you pay them earlier or later. For example, if you pay your employees early because your usual payday falls on a Bank Holiday, you should still enter your regular payday.
- You can send an FPS before your regular payday, for example if your payroll staff are going on holiday.
- Do not report too early – you’ll need to send a corrected FPS to update HMRC if information changes, for example an employee leaves, is sick or changes tax code.
- You cannot send reports for the new tax year before March.
There are some exceptions when you can send a late FPS.
Completing and sending an FPS
You’ll need to enter your PAYE reference and Accounts Office reference in your software. HMRC will have sent this to you after you registered as an employer.
To complete and send the FPS, follow your payroll software’s instructions.
HMRC has guidance on what to put in each field on an FPS, including:
- employer information
- employee information– only include employees you’ve paid
- pay and deductions
- National Insurance information
You can split your FPS into batches if it’s easier for you, for example one for employees and one for directors.
There are special rules for calculating deductions if your employee has more than one job with you.
After you’ve sent your FPS
In the next tax month (which starts on the 6th), you can:
- view your FPS and how much tax and National Insurance you owe in your HMRC online account from the 12th
- claim any reduction on what you’ll owe HMRC (for example statutory pay) by sending an Employer Payment Summary (EPS) by the 19th
- pay HMRC the balance by the 22nd (or the 19th if paying by post)
If you need to make an extra payment to your employee, send an extra FPS before your next regular report (if your software has this feature).
If you made a mistake in your FPS
You should correct any errors in your FPS as soon as you find them.
Reporting extra information
You need to report more information on an FPS if:
- it includes a new employee
- an employee leaves
- you start paying someone a workplace pension
- it’s the last report of tax year
You may also need to report extra information about certain employee changes, for example they take a leave of absence or become a director.
We hope this has helped. If you’d like to talk through any of this with us, please do so. Regardless of whether you are a client or not. We won’t charge.