We are often asked this question by business owners taking on their first employee particularly if they are not going to be working many hours. Employers believe that because they aren't paying their employee very much they don't need to put them on the payroll but that is not necessarily the case. Or perhaps because they are just taking them on for a trial period of a week or month they think it is a waste of time adding them to the payroll. Neither of these reasons will be considered by HMRC as an acceptable excuse for not putting your employee on the payroll if it is found later that they should have been.
Earnings include basic pay, hourly pay, holiday pay, overtime, commission, notice pay and bonus. It also includes parental pay and sick pay. Repayment of expenses incurred or mileage are not earnings. All earnings are subject to tax and NI deductions when the threshold is reached. These are the thresholds for deductions.
As well as deciding what your new employee will be paid (which must be at least the Minimum or Living Wage) you will need to decide whether you need to set up a payroll if you are a new employer. You should therefore ask every new employee to complete a starter form so you can gather the required information from your employee which will enable you to decide whether or not you need a payroll. Here is a link to an online or downloadable starter form which can be found on HMRC website. The starter form completed by your employee will tell you if this is the only employment they have or whether they have other work.
If your employee says they have another job they must be put on a payroll even if their earnings are low because they must pay tax and NI contributions on all earnings over the threshold even if the earnings are from multiple employers. If the employee feels they are being taxed when they shouldn't be because their earnings are low they must speak to HMRC to have their tax code shared between their employments so that they don't pay too much or too little tax during the year.
If your employee doesn't have another job and earns below £118 per week there will be no deductions to be made and therefore you don't have to set up a payroll for them. However, if you already have a payroll for other employees and take on someone who is earning below £118 per week they must go on the payroll because once you have a payroll set up every employee must go on it.
Employers often think it is easier not to put their staff on the payroll because they don't earn much and it seems like a lot of hassle. HMRC would not find this an acceptable excuse.
Employees ask not to go on the payroll because they don't want deductions from their pay, maybe because they don't consider they earn enough to pay tax and NI. HMRC will not accept this either because as an employer it is your responsibility to make the correct deductions from your employees' pay. And as one of their employers you have no idea what they are earning in their other work. And if you fail to make the appropriate deductions you may find HMRC requires you to pay the NI contributions you should have deducted.
If an employee provides you with an invoice for their work it doesn't mean that they can be self employed. Employees do this as they want to set all their expenses against their earnings when they complete their tax return as they would if they are running a business but if they are working only for you they are more likely to be an employee and should go on your payroll. You need to decide whether the work they will do is classed as employment or self employment. You can use the HMRC tool Check Employment Status to help you make this decision.
When your employee is on the payroll you must make the appropriate deductions from their pay and remember to set up and enrol them in an auto enrolment pension scheme within three months of their start date if they meet the criteria.
Our payroll clients ask us all sorts of questions about employing and paying staff which we are happy to answer. Payroll, and auto enrolment, can be confusing but it is important to get it right for both the employee and the employer.
If you would like payroll peace of mind and support with your questions give us a call to see how our payroll and and auto enrolment service can support your business.