There are several things to think about and plan for when you take on a new employee and especially when it is your first employee. What will it cost? Do I have to pay for holidays? What breaks are they entitled to? What about sickness?
As a provider of payroll services we are asked lots of questions by employers. Here are a few of the more frequent topics we are asked about.
What will it cost?
One of the most important things to consider is how much your new employee will cost your business. You might know how much you want to pay by the hour, week, month or annually but that won't be the only cost to your business. Firstly you must ensure that what you are paying is at least the national minimum wage in force at the time and that you increase the rate each year that the national minimum wage increases. So you need to plan for these increases. If you choose to pay an annual salary make sure that when you break it down to an hourly rate that it still meets the minimum wage requirement.
You will have to pay Employers National Insurance contributions which are payable on earnings over £737 per month (2021-22 rates). The Employment Allowance will cover these contributions up to £4,000 in one tax year so you will only have to pay contributions once you have used this allowance.
The other cost to your business will be pension contributions of 3% of salary on earnings over £833 per month.
If you think your employee will need to do extra hours decide how this will work. Will you pay them at their normal rate, at time and a half, double rate or give them time off in lieu. Whatever option you choose will either cost you additional employers NI and pension contributions or your employee being absent when you need them (if they take time in lieu).
So when you are planning how much to pay don't forget to take these additional costs into account.
Gross Pay versus Net Pay Warning
The amount you want to pay your employee is Gross Pay and from this deductions are made for tax and employee national insurance which you pay across to HMRC on your employee's behalf. The employee's pension contribution (if they want to contribute) is also deducted from the Gross Pay. Your employee receives Net Pay which is the pay which is left after these deductions.
If you agree to pay your employee Net Pay and not Gross Pay you are responsible for paying the employee tax, the employee national insurance and the employee pension contribution as well as your own national insurance and pension contributions on top of that net pay. This can cost you a significant amount more than the Gross Pay you originally wanted to pay.
My warning - never agree to a take home pay figure that your employee wants. It is likely to be a very costly mistake which you may never be able to change.
Working Hours, Breaks and Holidays
Your business will have a set number of working hours - for example 9am to 5pm 5 days a week with a one hour break for lunch is a 35 hour working week. All employees' pay and holiday should be worked out based on the working hours of the business. Whilst an employee may work part-time 20 hours per week, the days and times those hours are worked should be set out in the contract.
Breaks during the day don't have to be paid, but whether they are paid or not paid must be set out in the contract of employment. Employees must have an uninterrupted break of at least 20 minutes if they work 6 hours or more during a day. Workers aged 18 and under must have a 30 minute break if they work more than 4.5 hours. Whatever your policy is you should be consistent across all employees and ensure it is set out clearly in the statement of employment. You may not realise how much extra it costs you to pay people for their lunch break and whilst that is a generous gesture for your first one or two employees it could become very costly as your business grows.
Holidays are calculated based on the holiday period set out in the statement of employment. The statutory minimum holiday is 20 days plus bank holidays (5.6 weeks) and all employees are entitled to this and must take it. They cannot be paid for it if they don't want to or can't take this minimum requirement during the year. This minimum is set to ensure that every employee receives paid time off.
A part-time employee would receive only a proportion of the 20 days plus bank holidays with the proportion being based on the hours they work compared to the full-time equivalent. In years where there is an additional bank holiday (as we have in 2022) the holiday calculation for part-time workers must take this additional day into account. Of course an employer can give more than the statutory holiday and any amount which is not taken above the statutory 20 days could be paid or carried forward.
An employee who works irregular hours must have their holiday calculated based on the average number of hours they have worked in the previous 52 or 104 weeks. Even if they only work a few hours a week they must take this time off and be paid for it so they receive the equivalent of 5.6 weeks of paid holiday each year.
Statement of Employment
This document holds all the conditions of employment. It will have details of, amongst other things, salary, working hours, location of work, paid or unpaid breaks, holiday entitlement and whether this includes or excludes bank holidays, details of statutory and voluntary deductions, sickness absence pay and set out recovery of any loans or other deductions to be made. It is an important document to get right and once you have one the foundation of it will be the same for each employee. Of course salary changes from time to time, as may job role and working hours and these would be confirmed separately as the other conditions of employment will remain the same.
All the points I have set out above are questions that crop up when we run payroll for the employers we work with. Employers want to know how much it will actually cost them to take on a new employee and we can do that calculation for them. We can explain why agreeing net pay is not advisable. We can ensure that they receive all of the Employment Allowance they are entitled to. We can calculate holiday owed to leavers (which is the only time you can pay for holiday not taken) and for casual workers. We also deal with HMRC on your behalf if any issues arise.
We are payroll specialists and can support you with every aspect of paying your staff and making the correct deductions and as long as you have put a statement of employment in place you have a framework to work with across all your employees.
Give us a call on 01722 341820 if you want to take the stress out of running payroll and dealing with HMRC.