Tax Advice

How to Employ Someone in a Small Business in the UK

There’s a lot that goes into finding and hiring someone to join you in your small business. First, there’s deciding whether to handle the recruitment yourself or letting an external recruitment agency find candidates for you. Then there’s the interview stage and finally selecting a candidate.

Another thing you need to be aware of are your legal obligations as an employer. Things like making sure your new employee has all the documents required to work in the UK and determining how much you can afford to pay them—this figure must include National Minimum and Living Wage rates.

Then there are the other costs involved, such as employers’ liability insurance and employer’s pension and National Insurance contributions. It sounds like a lot. But don’t panic! Here’s a roundup of everything you need to know when it comes to hiring a new employee in the UK.

 

Employing Staff

There are several actions you need to consider before, and when, you employ someone to work for your small business.

Decide What Type of Employee You Need

Do you need somebody to work with you full-time or part-time? And what should their employment status be? You have several options here:

• Worker
• Employee
• Employee shareholder
• Self-employed or contractor
• Director
• Office holder

The Recruitment Process

You need to advertise your new position and interview prospective employees. You can do this yourself or work with a recruitment agency. As an employer, it’s your job to make sure you recruit employees fairly. You’ll need to avoid discrimination during recruitment and make your application process accessible for people with a health condition or disability.

Check Your Employee’s Right to Work

Make sure that your new employee has the legal right to work in the UK. To prove this, you’ll need a form of identification accepted by HMRC. And be aware there are fines for employing someone illegally in the UK. We’ll cover the accepted legal documents and fines in more detail later.

See If Your Employee Needs a DBS Check

Depending on your field of work, your new employee may also need to complete a Disclosure and Barring Service (DBS) check. It’s likely they’ll need to complete this if they’re going to be working with vulnerable people or in high-risk industries such as security.

Scotland and Northern Ireland have different rules about this.

Register as an Employer

You need to register as an employer with HMRC before your employee’s first payday. It can take up to 5 working days to get your pay-as-you-earn (PAYE) reference number, and you can’t register more than 2 months before you start paying people.

You’ll need their P45 (which will include important information, such as their National Insurance number) or HMRC’s employee starter checklist to work out their tax code for your payroll and find out if they need to repay a student loan.

Set Up a Workplace Pension Scheme

You’ll need to enrol your new employee and make employer contributions if:

• They’re aged between 22 and the state pension age
• They earn £10,000 or more per year
• They usually work in the UK (including if they live in the UK but travel abroad as part of their job)

If the employee becomes eligible for a workplace pension scheme because of a change in their age or earnings, you must enrol them and notify them of this within 6 weeks.

Agree on a Contract and Salary

Decide how much you’re going to pay someone and create an employment contract for them to sign. Be aware of the National Minimum Wage and Living Wage rates when calculating a salary (we’ll get to this in the section below).

You must also inform your employee of any changes to the employment contract during their employment at least 1 month in advance of the change happening.

Take Out Employers’ Liability Insurance

As soon as you become an employer, you’ll need employers’ liability (EL) insurance. This will help you in the event of an employee becoming injured or ill because of the work they do for you. You must be insured up to £5 million by an authorised insurer.

You can be fined £2,500 per day if you’re not insured, and be fined £1,000 if you can’t or won’t show your EL certificate to inspectors when asked.

Do You Have to Be a Limited Company to Employ Someone?

It’s not just limited company owners who can hire employees. Sole traders can recruit people as well. However, there are several factors you should consider if you’re self-employed and considering hiring somebody. Unanticipated problems can cost you time, resources, and money.

Like limited company owners, sole traders also need to register as an employer with HMRC and register for PAYE when hiring employees. HMRC will then issue you your reference number. Using accounting software can be helpful here.

How Much Does It Cost to Employ Someone in the UK?

You must pay your employee the National Minimum Wage, or the National Living Wage, as a minimum. The wage you need to pay depends on their age. Employees aged 18–22 are entitled to the Minimum Wage, whilst those aged 23 and over are entitled to the Living Wage.

From April 2022, the National Minimum Wage and National Living Wage rates will be:

• Under 18: £4.81
• 18–20: £6.83
• 21–22: £9.18
• 23 and over: £9.50

These figures are calculated hourly. If you pay your employee a salary, you need to work out what the hourly equivalent of this is to make sure you’re paying them the right wage.

Alternatively, you can choose to pay your employee the Real Living Wage. This is currently £9.90 across the UK and £11.05 in London, and those over 18 are eligible. Unlike the National Minimum and Living Wages, the Real Living Wage is voluntary.

You also need to consider your employee’s other paid entitlements, including:

• Holiday pay (which covers bank holidays)
• Sick pay
• Maternity and paternity pay

Along with the other costs of hiring somebody, including:

• Employer’s National Insurance contributions at 13.8%
• Employer pension contributions at a minimum of 3% (plus 5% from your employee, for a total of 8%)
• Employers’ liability insurance
• Any equipment your employee needs to do their job
• PAYE payroll system running costs
• Recruitment costs

What Legal Documents Do You Need to Work in the UK?

To be legally entitled to work in the UK, your employee must have one of these documents:

• British passport
• British citizenship
• European Economic Area (EEA) citizenship
• Swiss citizenship
• Work visa
• Work permit

If you employ someone illegally, you can be fined up to £20,000 per illegal employee. This includes workers who’ve forged documents, who’re using expired visas, or documents that don’t cover your industry. Companies that employ illegal immigrants could also have their names published by Immigration Enforcement.

Checklist for Hiring Employees

Before we conclude this article, let’s quickly recap everything you need to do when hiring someone in the UK:

1. Create a clear job description
2. Decide who’s responsible for recruitment
3. Make sure your employee has the right to work in the UK
4. Keep up-to-date tax records
5. Know your employee’s rights
6. Get EL insurance
7. Set up payroll
8. Keep files for each employee
9. Make sure your employees can easily access records
10. Be clear about goals and expectations

Know Your Legal Obligations as an Employer

Following the legal requirements for making a new hire is essential. It’s also vital to know the costs of employing someone in the UK and making sure they receive the National Minimum or Living Wage as a minimum. But now you know what you need to consider when hiring somebody, and can use this information to stay organised and make sure your new hire process goes smoothly.