If your employee or all your employees earn below the Lower Earnings Limit of £120 per week you do not need to register as an employer, except if
- they have another job
- they are in receipt of a pension
- they receive expenses or benefits from you.
For each employee you need to establish whether they are in any of these situations and if any one of them is you will need to set up a PAYE scheme. If you do not need to have a payroll you will still need to keep employee records for 3 years plus the current year as evidence that you did not need to set up a scheme. You must follow data protection rules when retaining records about your employees.
What is a payroll scheme?
Registering as an employer means setting up a PAYE scheme with HMRC who will provide you with a PAYE reference for your business and with an Accounts Office reference which you will use to pay across to HMRC the deductions you have made from an employees pay for tax and National Insurance.
Once you are registered as an employer all the staff you employ will need to be registered on the payroll even if they earn below the Lower Earnings Limit of £120. You can't choose which employees to have on the payroll. They must all be on it whatever their earnings. Earnings include hourly pay, salary, overtime, bonus, commission, tips and maternity pay.
Why do you need a payroll scheme?
The reason you will need to have a payroll scheme is because you may have to make deductions from the employees' pay for tax. Everyone is entitled to a level of tax free earnings each year but, whilst you know you may not be paying your employee at a level at which tax is due, you don't know the level of their other income, pension or benefits and whether they are paying tax on it. This is a personal situation and not something you would ask them in order to make a decision on whether to set up a payroll scheme. If tax is not deducted from the amount you pay your employee and is not deducted by another employer the employee may find themselves with a tax bill they can't afford to pay because they have earned over the personal allowance threshold.
Once you have a payroll scheme and register your employee on it with the emergency tax code HMRC will provide a new tax code which will take into account any other income the employee has to ensure they are paying the correct level of tax.
Businesses will sometimes employ young casual staff who work only a few hours each week or month and their earnings are below £120 per week. If you have several staff in this situation and you have established with each of them that they have no other earnings and they receive no taxable benefits from you then you will not need to register as an employer. But as soon as one of these employees earns over the threshold or gets an additional job you must set up a PAYE scheme and all employees must be included in your payroll.
The last year has shown that individuals who have received casual earnings (often in cash) for one or more jobs which have not been reported through a payroll or through a self-assessment tax return have not been able to claim the SEISS grants if they were self-employed nor be entitled to furlough pay from their employer as HMRC had no record of their earnings.
Employee v Self-Employed
Some businesses prefer to use someone who is self-employed rather than employ staff because they think this is easier and less costly. However it could cost you more to regularly use someone who is self-employed who HMRC subsequently deems to be an employee as they will recover the Employers National Insurance contributions you should have paid on those earnings as well as charging you a penalty. There are rules around how to determine whether a worker is employed or self-employed which you should be familiar with if you are using someone who is self-employed.
If you choose not to employ staff because you think it is too complicated or expensive to have a payroll scheme talk to us and we can explain how easy outsourcing your payroll is. It saves you time and you don't need to do anything except provide information about your employees and any changes to their pay. We do the rest, including registering you as an employer, ensuring deductions are made correctly and providing you with the amounts you need to pay your employees. In addition we deal with statutory payments such as maternity and paternity pay, sick pay and calculate furlough payments as well as making furlough and SSP COVID-19 claims. We will give you advice and guidance too if there is any payroll or employee situation you are unsure about.
Give us a call to see how easily we can manage your payroll, give you back time and relieve you of the thought of having to deal with HMRC.