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Small Business Tips

What Tax Forms Do I Need When Hiring New Employees?

Andre Spiteri
Excited colleagues welcoming new employee in office|Text ONBOARDING appearing behind ripped brown paper|welcome aboard

You've read through endless CVs, held interview after interview and heard at least ten different answers to the same questions. After much thought and deliberation, you've finally settled on your perfect new hire.Great news, right? But before your new employee can roll up their sleeves and crack on, there's some stuff you have to do. You need to tell HMRC about them, fill in the right tax forms and get them legally squared away.Here's how to go about this.

Who counts as an employee?

An employee is a person who works for you under an employment contract. HMRC considers your staff to be employees if most of the following statements about them are true:

  • They always have to work for you during business hours unless they take time off, for example, to go on holiday or because they're sick
  • You expect them to work a minimum number of hours each week
  • Paid a regular salary
  • You or a supervisor manages their workload and tells them how they should do their work, by when they have to finish it and where they should do the work (this is usually your business premises, temporary premises or a client's office)
  • They can't send someone else to do their work for them
  • You provide the tools and equipment they need to do their job
  • They get paid holidays, statutory sick pay, maternity or paternity pay and can join your workplace pension scheme
  • Their employment contract:
  • Uses the terms ‘employer' and ‘employee'
  • Sets out redundancy procedures, that is the process you have to use to fire them if you no longer need their services, for example, because business has slowed down
  • Sets out disciplinary procedures, including how they can complain about correcting measures you've taken against them
Text ONBOARDING appearing behind ripped brown paper

How do I onboard a new hire?

Before we dive into the fun tax stuff, there are two things you need to get out of the way.Firstly, you have to check your new employee's immigration status. And, secondly, you have to find out if they need a DBS (Disclosure and Barring Service) check.

Who can I hire to work for me?

You can take on an employee only if they have a legal right to live and work in the UK. In other words, your new employee must be one of the following:

It's your duty as an employer to check every new employee's immigration status before you take them on board. Seeing as you could be fined up to £20,000 for hiring an illegal worker, you definitely shouldn't skip this step.To check your new hire's immigration status:

  • See their original documents, typically their passport and, where applicable, visa and work permit documents
  • Check that they're valid in your new employee's presence
  • Take copies and file them
  • Write down the date you made the check

What is a DBS check, and when do I need to do it?

A DBS check is a criminal record check. You have to run a DBS check if you're hiring someone to work in:

  • A school, nursery or other environments where your employee will be around children, hospitals, clinics and private nursing care
  • Financial services
  • A law firm

A prospective employee can request an investigation if you ask them to do a DBS check, but they think they don't need one. So, while it might seem like a good idea to carry one out to be safe, it's best to do it only if it's a legal requirement. HMRC has detailed guidance on when you should run DBS checks.

welcome aboard

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How do you tell HMRC about your new employee?

As a rule, you have to pay new starters through HMRC's PAYE (Pay As You Earn) system if they earn £116 or more a week (this is equal to £503 a month, or £6,032 a year).The PAYE system calculates how much tax and National Insurance each employee owes HMRC so that you can deduct it. You also have to pay employer's National Insurance, which is called Class 1 National Insurance.Here's how to get your new employee set up for PAYE:

Step 1: If you haven't done so already, register as an employer online

When you register, HMRC will send you a unique PAYE reference number, which you'll need to set up payroll. You must register as an employer before your employee's first payday. So, seeing as it can take up to five days to get your PAYE reference number in the post, it's a good idea to register as soon as possible. You can register up to two months before your new employee's first payday.

Step 2: Set up PAYE

You can either hire an accountant to do this for you or do it yourself. If you choose to do it yourself, you'll need to download special software: either HMRC's Basic PAYE Tools or another HMRC-approved option.

Step 3: Collect information from your new employee

You'll need to collect some information from your new employee to work out their tax code and register them for PAYE (we'll tackle this in more detail below). You'll also need to find out if they're repaying a student loan.

Step 4: Register your new employee

Use the information in step 3 to set up your new employee in your HMRC-approved payroll software. Once you've filled in all the details, the software will allow you to send a Full Payment Submission (FPS) to HMRC.

What information do I need to register an employee for PAYE?

To register an employee for PAYE, you'll need their personal details — name, address, date of birth and gender — and their employment start date.You'll also need the following information, which you can get from their latest P45 form. Your new employee should get this form from their last employer:

  • The date they left their previous job.
  • Their current tax code, how much they earned and how much tax they paid during the current tax year.
  • National Insurance number.
  • Their student loan deduction status. Employees have to make student loan repayments if they earn £25,000 or more in England and Wales or £18,330 or more in Scotland and Northern Ireland.

What if my new employee doesn't have a P45 form?

If your new hire doesn't have a P45 form, for example, because they're new to the UK or haven't worked for a while, you'll need to ask them to fill in HMRC's new starter checklist. They can fill this in online and print it or download it and fill it in manually.Once your new employee completes the HMRC starter checklist, you can use the information to get them set up for PAYE. You'll also need to work out their tax code, which you can do using HMRC's online tool.

What if my new employee has more than one P45 form?

You should always use the latest P45 form. If there's more than one P45 form with the same leaving date, for example, because your employee had multiple jobs they left to come work for you, then you should pick the one with the highest tax-free allowance.

What about workplace pension contributions?

As an employer, you have to enrol your employees in a workplace pension scheme if:

  • They're over 22 but under the state pension age.
  • You pay them more than £10,000 a year.
  • They earn less than £10,000 a year but more than £6,032 a year and invites you to join the scheme. If an employee makes more than £6,032 a year and asks to participate, you can't refuse.
  • They usually work within the UK. For instance, employees who are based in the UK but regularly travel abroad.

Like tax and National Insurance, you have to deduct pension contributions automatically from your employee's salary and pay them into your pension scheme. You also have to contribute to each employee's pension out of your own pocket.

How do I enrol new employees in a workplace pension?

  • Step 1: Select a pension scheme. Examples are a government-backed NEST pension scheme or one of the many private pension schemes on the market, as long as it meets the Pension Regulator's criteria.
  • Step 2: Add your new employee to the scheme from their employment starting date. How you go about this will depend on the way your chosen pension scheme works.
  • Step 3: Deduct your employee's pension contributions from their salary and pay them into the scheme.
  • Step 4: Pay your own contributions.

Tips on making your new hire feel welcome

You've got your new employee legally squared away. Great.But, as important as the formalities are, it's also worth going the extra mile to make them feel welcome. Your welcoming action sets the stage for what will hopefully be a long and fruitful relationship.Here are a few tips:

  • Show them you've been looking forward to having them by getting their workstation ready ahead of time. If, for example, you've hired someone to work in the office, have their computer, email account, desk and chair set up the day before so they can settle in and get to work straight away.
  • Give them a tour so they can get used to their surroundings. Don't forget to show them where everything is — files, storage, the bathroom and that all-important coffee machine.
  • Help them out as much as you can during the first few weeks. Or pair them up with a more experienced employee who can show them the ropes and offer encouragement.
  • Ask them how everything's going. Do they have any questions? Is there anything they need that you forgot to get for them? Showing you care about their well-being at work makes a world of difference.

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