As a business owner in the UK, employing staff is a significant milestone that comes with various responsibilities, including understanding the tax implications involved.
Navigating the intricacies of business tax accounts, National Insurance contributions, PAYE (Pay As You Earn), and the benefits of Employment Allowance is crucial to ensure compliance and make informed decisions.
In this article, we will explore the tax considerations and obligations that arise when employing staff in the UK, providing valuable insights to help you manage your business tax account effectively and optimise tax efficiency.
Tax Implications of Employing Staff in the UK
Picture this: as an employer in the UK, you carry the responsibility of collecting and paying taxes to HMRC. But here's the insider tip: remember even the director of your business is considered an employee. So, buckle up as we dive into the captivating world of UK tax obligations for employers.
Understanding The UK PAYE System
This intricate system ensures that employers collect taxes on behalf of the employees from their wages of their hard work and pay them to HMRC. Want to crack the code?
The employee's tax code holds the key to calculating monthly tax deductions, whether through specialised payroll software, a trusted provider, or HMRC's 'Basic PAYE Tools.' Brace yourself for real-time information reporting—a game-changer in the PAYE landscape.
Due Date for Payment of PAYE
Mark your calendar—PAYE is due 17 days after each tax month's end if you're making electronic payments. If you prefer the traditional route, you have 14 days after the month's end to settle the bill.
Pro tip: for those with an average monthly tax and NICs due under £1,500, quarterly payment is an option. And if you're a big player with 250 or more employees, electronic payments are a must.
Year End Procedures
As the tax year draws to a close, it's time for the grand finale—year-end procedures. Prepare yourself for two star players: P60 and P11D.
P60
The employer provides the employee with a P60 if they earned at or above the lower earnings limit for National Insurance purposes. It must be given no later than 31 May following the end of the tax year. The employee uses the details on the P60 for their own self-assessment tax return. It includes information such as taxable earnings, tax deductions, NIC deductions, and basic details.
P11D
Form P11D is completed and submitted to HMRC when an employee has received taxable benefits that weren't subject to tax via payroll. It contains details of the cash equivalent of each benefit provided. The deadline for submitting P11D forms to HMRC is 6 July following the end of the tax year.
National Insurance Contribution (NIC)
NICs serve the purpose of providing retirement benefits such as the state pension and funding social security benefits. There are six classes of National Insurance Contribution (NICs):
Class 1 NICs
Class 1 NICs is paid by both employees (primary contributions) and employers (secondary contributions) on earnings from employment. These contributions are accounted for under the PAYE system and are paid over to HMRC, along with income tax, on the 22nd of each month where payment is made electronically (otherwise on the 19th).
What does earnings in National Insurance contribution (NIC) include?
Earnings include the following:
- Cash payments (other than reimbursement of genuine business expenses).
- Payments in kind that can be surrendered for cash.
- Readily convertible assets.
- Settlement of employee’s personal liability.
- Vouchers (except childcare to the extent it does not exceed the exempt amounts).
How do we calculate the class 1 NIC?
Class 1 primary NIC:
The calculation is done based on the earnings for employees. (Below is rate for the tax year 2023/24)
For first £242 per week there is no class 1 primary NIC
From £242 to £967 per week class 1 primary NIC is paid at 12%
For earnings above £967 per week class 1 primary NIC is paid at 2%
Check our article "Rates and Threshold for National Insurance Contributions" for more detail.
Calculation and Maximum Amount of Primary Class 1 NICs
The calculation of primary Class 1 NICs is based on earnings from employment.
Class 1 secondary NIC
Class 1 secondary NIC are payable at 13.8% (for the tax year 2023/24) on excess of earnings above £175 per week.
Class 1A NICs
Paid by employers on certain taxable benefits and taxable termination payments exceeding the £30,000 exemption. It is charged at the employer's rate of 13.8% (for the tax year 2023/24). Class 1A NICs do not apply to benefits already subject to Class 1 secondary NICs or Class 1B NICs.
Where payment is made electronically the deadline for Class 1A NICs is 22 July following the tax year.
Where payment is not made electronically the deadline for Class 1A NICs is 22 July following the tax year.
The amount of class 1A NICs is notified to HMRC through form P11D.
Employment Class 1 National Insurance Calculator
Try out our exclusive National Insurance Calculator. Make your work easier while setting up payroll of your staffs.Class 1B NIC
Class 1B NIC is paid by employers only on PAYE Settlement Agreements (PSAs).
PSA enables the employer to settle the employee's tax responsibility for small or occasional payments related to benefits and expenses.
Class 2 NIC
Class 2 NIC is paid by self-employed to qualify for benefits such as state pension.
It is paid on flat rate on a weekly basis. For tax year 2023-24 the rate payable for class 2 NIC is £3.45 per week.
Most people pay the contributions as part of self-assessment tax bill.
Class 3 NIC
Class 3 National Insurance Contributions (NICs) are optional payments made by taxpayers who want to supplement their contribution history, ensuring they maintain eligibility for state benefits.
There are several reasons why you might consider making voluntary contributions:
- If you are nearing State Pension age and lack sufficient qualifying years to receive the full State Pension amount.
- If you anticipate that you won't be able to accumulate the necessary qualifying years for the full State Pension during your working years.
- If you are self-employed, file Self-Assessment tax returns, and are exempt from paying Class 2 contributions due to low profits.
- If you reside outside the UK but desire to be eligible for certain benefits.
Class 4 NIC
Class 4 NIC is paid by self-employed persons on the profits from their trade.
Rates for tax year 2023/24 is 9% on profits between £12,570 and £50,270; 2% on profits over £50,270.
A Complete Guide on UK National Insurance Contributions | Rates, Thresholds, and Allowances
Dive into our comprehensive article on UK National Insurance Contributions. Learn about Rates, Thresholds, and Allowances to make informed financial decisions.
Benefits of Employment Allowance
Conclusion
Employing staff in the UK entails various tax considerations and obligations that must be effectively managed. Understanding the UK PAYE system, calculating and maximising NICs, and being aware of the different classes of NICs are vital for compliance.
Additionally, the Employment Allowance can significantly reduce secondary Class 1 NICs for eligible employers. By staying informed about these tax implications and obligations, you can navigate the complexities of employing staff and optimise tax efficiency for your business.
