Taking on an employee is a major step for you and your business. It can allow you to increase your business’s capacity, improve customer service and free up your valuable time, but it also brings additional financial, payroll and employment-law responsibilities.
Furthermore, there is also the job of ensuring your business is actually ready to take on staff. As with anything when running a business, it is far simpler to get things right from the start rather than scrambling to fix things when they go wrong.
With that in mind, this article lays out a few things to consider when taking on your first members of staff. Please note, although we’ll touch on many key points, this list is by no means exhaustive, so we highly recommend speaking to our team!
Is it time for your first hire?
When deciding whether to hire a member of staff, you should first think carefully about whether there is a want or need they would be fulfilling, and whether it is the right time for your business to be taking on.
To do this, you should consider whether there is enough consistent demand to provide regular work, how much additional income the employee could help generate and whether this will outweigh the full cost of employing them.
In addition to salary, you will incur direct costs such as Employers NIC and Employers pension contribution. You could also incur further costs in relation to holiday pay and sick pay depending, equipment, training, insurance etc.
Employing someone also means taking responsibility for another person’s financial security, and business owners may sometimes need to pay themselves last to ensure wages and other costs are covered.
The recruitment, onboarding, contracting and training processes can require significant time and investment, particularly for the first hire.
However, bringing the right person into the business can provide support, strengthen the company culture and create opportunities for significant growth that may not otherwise be possible.
You should consider what value an employee would bring or what role they would fulfil. We recommend having a clear break down of the role and responsibilities from your employee, to align your expectations of them.
Is your business structure suitable?
Your business’s legal structure doesn’t change the way payroll, taxes or benefits are processed, however taking on an employee can still be a good time to consider whether your structure is still the most suitable option. A common question we hear is: ‘Can Sole Traders have Employees/Staff?’
The answer is yes, legally, you can employ staff as a sole trader or partnership. Sole-trader status doesn’t have to mean working independently: it instead refers to the nature of your relationship to the business. As a sole-trader, you are the business, rather than the business being an entity of its own.
This doesn’t stop sole traders having staff, and in fact the process of getting ready for payroll is very similar to that of a limited company, (more on that below).
However, be aware that the risks of sole-trader status are amplified when you have employees. Remember, while limited companies have – you guessed it – limited liability, partnerships and sole traders have unlimited liability.
So, in the unfortunate event that a successful claim is made against you by an employee, (eg unfair dismissal or grievances), or a claim is made against an employee by a client, it’s you who foots the bill. That means your personal savings, your car and even your home are on the line.
That said, going limited can mean more paperwork and administrative burden to deal with. Whether you’re considering setting up a limited company, or want help structuring your business, our trusted partners at Danbro Accounting can advise.
Payroll Responsibilities
Regardless of your business structure, there are a few core responsibilities that come employing staff.
Thankfully, HMRC have a handy step-by-step workflow to help get you set up, including registering as an employer, setting up PAYE, and checking your responsibilities. You must register as an employer before your employee’s first payday, and notify HMRC when you take on a new staff member. As soon as you become an employer, you must also get at least £5million of Employer’s Liability Insurance from an authorised insurer.
Aside from that, responsibilities include using a payroll software that can automatically process statutory deductions such as tax, NIC and pension contributions. You must provide an accurate payslip and report the employee’s pay and deductions to HMRC through a Full Payment Submission, usually on or before payday.
You must also pay the relevant deductions and employer contributions to HMRC by the applicable deadlines, manage payroll changes such as pay rises, bonuses, sickness, family leave and departures, and retain adequate payroll records. These responsibilities remain with the employer even where payroll processing is outsourced to an accountant or specialist provider.
Finally, you must keep on top of any changes to worker regulations such as national minimum wage.
Providing Benefits
In the UK, employers must provide certain benefits by law. These are known as statutory benefits, and include paid annual leave, paid maternity, paternity and adoption leave, shared parental leave, statutory sick pay and time off for public duties.
Aside from statutory benefits, some employers choose to offer additional or supplementary benefits to improve employee satisfaction and retention. These often include higher than mandatory annual leave, private medical cash plans, retail discount schemes, salary sacrifice EV schemes, and insurance products (some of which, such as relevant life cover, can be deemed an expense upon which tax can be offset).
Be aware, from April 2027, taxable benefits will need to be reported in real time. You can read what that means here.
We appreciate this may all sound very complicated, which is why MYHR help business develop competitive and compliant benefits packages to ensure a strong Employer Value Proposition (EVP).
Pension Responsibilities
As an employer, you are obligated to enrol the employee into workplace pension scheme from day one of their employment where the following eligibility criteria is met:
- Member of staff is between 22 and state pension age
- They earn at least £10,000 a year
- They normally work in the UK
Although you have to opt them in, they can choose to opt out and opt back in at a later date. Similarly, even if the employee does not hit the auto-enrolment criteria, you must enrol them if they ask you to, although you don’t have to make employer contributions.
Speaking of, employer contributions must be a minimum of 3%, while 5% comes from the employee’s qualifying earnings.
The best workplace pension for you and your employees will vary, but MYHR are on hand to help you source and understand a suitable pension scheme.
Key HR Rules
So far, we’ve covered many of the financial regulations of employment. However, there are a few key HR frameworks you must also adhere to, both for compliance, and for the benefit of your business’s culture and employees.
These include but are not limited to:
Equality Act 2010: protects employees from discrimination, harassment and victimisation linked to protected characteristics such as age, race, sex and disability.
Health and Safety at Work Act 1974: requires employers to provide a safe working environment and, where they employ five or more people, to record their health and safety arrangements in writing.
Employment Rights Act 1996: sets out a range of statutory employment rights, including those relating to unfair dismissal, redundancy and flexible working.
Working Time Regulations 1998: govern matters such as maximum weekly working hours, rest breaks and paid annual leave.
Data Protection Act 2018: regulates how employers collect, store and use employee personal data.
Summary
As you can see, taking on an employee is not a decision to be taken lightly. It comes with significant administrative, tax and HR responsibilities. However, it can also be the decision that takes your business to the next level.
To take this step with confidence, the team at MYHR, as well as Danbro Accounting, are on hand to guide you through this exciting change.