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6 min read

Employing staff – how much will is cost my business?

So, you’re thinking of starting your own business and need to take on staff? Or maybe you’ve been running your own business for some time and it’s grown to the point where you need to employ people to deal with increased demand. You may simply want to free up more of your own time.

Taking on staff for the first time is a big milestone. Although employing new people can be a challenge, even for those with years of experience, when you get it right it can bring great rewards.

Only a quarter of the UK’s 5.9m businesses have employees (it was a third in 2000). If you haven’t employed staff before, you’re likely to have many questions, but chief among will probably be – “how much will it cost my business?”

What is PAYE?

PAYE is the system HMRC (HM Revenue & Customs – the UK tax authority) uses to collect Income Tax and National Insurance contributions (NICs) from employment.

Most employers (or their service providers) use PAYE-compliant payroll software. But, as explained on government website GOV.UK: “You do not need to register for PAYE if none of your employees is paid £120 or more a week, gets expenses and benefits, has another job or gets a pension. However, you must keep payroll records.”

As well as deducting payable Income Tax and NICs from your employees’ pay, you must report – in real-time – details to HMRC and pay any tax and NI owed. When choosing payroll software, make sure it can report in real-time (ie when deductions are taken and wages paid). Suppliers offering outsourced payroll services will have such software. They charge a monthly fee.

You must also provide your employees with a payslip, showing how much they’ve been paid and what deductions have been taken from their pay.

What are National Insurance contributions?

Employees earning more than £183 a week pay NICs, which entitles them to certain benefits and the State Pension. You will need you employee’s National Insurance number before they can start deducting and paying their NICs.

There are different classes of National Insurance. Employment status and earnings determine the class that is paid and how much. Employees who earn more than £183 a week and are under State Pension age pay Class 1 NICs. You (the employer or your service provider) deduct these when doing your payroll.

For the 2020/2021 tax year:

  • Class 1 NICs of 12% are payable on earnings between £183 and £962 a week (ie £792 to £4,167 a month).
  • Class 1 NICs of 2% are payable on earnings of more than £962 a week (ie £4,167 a month).

If you’re a director and employee of a limited company, you probably already pay Class 1 NICs through your PAYE payroll.

Employers also pay towards employees’ National Insurance. For the 2020/2021 tax year, in most cases it’s 13.8% on employee earnings of more than £169 a week (ie more than £732 a month). Employers also pay Class 1A or 1B on expenses or benefits their employees receive.  

Visit GOV.UK for more on National Insurance rates and categories. You’ll also be able to find out about paying employers’ PAYE.

How much Income Tax is deducted?

Personal Allowance is how much an employee can earn before they are taxed.

The amount of Income Tax deducted from an employee’s earnings is determined by how much over the Personal Allowance threshold they earn and how much of their income falls within each tax band. Some of their income will be tax-free.

The Personal Allowance for most employees is £12,500 for 2020/21, but it will be slightly higher if your employee is claiming Marriage Allowance or Blind Person’s Allowance. It is lower if an employee earns more than £100,000 a year (employees do not get a Personal Allowance on taxable income of more than £125,000).

Employees who earn between £12,501 and £50,000 pay the 20% Basic Rate of Income Tax, while those earning between £50,001 and £150,000 a year pay the 40% Higher Rate of income tax. The Additional Rate of Income tax of 45% is payable on earnings of more than £150,000. Allowance and reliefs may also be claimed.

Visit GOV.UK for more about Income Tax rates and Personal Allowances.

What about employee student loans?

You can find out more about the terms for repaying student and postgraduate loans on GOV.UK. Below is a short summary of the main points. 

  • Learning for exams: Blonde female student in the university library, pile of books
    Thresholds

    The thresholds for making student loan deductions are:

    Plan 1 (*loan taken out before September 2012) – earnings of £19,390 a year (ie £1,615.83 a month or £372.88 a week).

    Plan 2 (*loan taken out after September 2012) – earnings of £26,575 a year (ie £2,214.58 a month or £511.05 a week).

  • sales manager giving advice to his couple clients
    Repayments

    Employees repay 9% of the amount they earn for Plan 1 and 2 once over the threshold.

  • Man watching at business center
    Postgraduate loans

    The earnings threshold is £21,000 a year (ie £1,750 a month or £403.84 a week). Employees repay 6% of the amount they earn once over the threshold.

Auto-enrolled pensions and payroll

As explained on The Pensions Regulator website: “Under the Pensions Act 2008, every employer in the UK must put certain staff into a workplace pension scheme and contribute towards it. This is called ‘automatic enrolment’.” Failure to comply with these legal duties can lead to fines.

Basically, a percentage of an employee’s pay is put into a chosen pension scheme automatically each payday, with employers also having to contribute. The employee may also benefit from tax relief. Employees must contribute 5% of their earnings, with employers having to contribute 3%.

The Pensions Regulator website offers advice about auto-enrolment for those starting a business, as well as information for employers about ongoing duties.

What are UK payroll costs?

Adding up all of the above will tell you how much your new employee will earn and what amounts you’ll need to deduct from their earnings. PAYE software makes this task quick and easy, while it also enables you (or your service provider) to report PAYE information to HMRC in “real-time” when you pay staff, which is a requirement.

If you get someone else to take care of your payroll, whether a bookkeeper, accountant or other service provider, obviously, you’ll have to pay them a monthly fee, but it could save you much time and effort. You’ll also have to pay your employer NICs, of course, which should be built into your calculations when working out all of the costs created by taking on staff. 

GOV.UK offers advice for employers on payroll software. Also read our guide to operating payroll.

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