Becoming an employer is a significant step in one's career, and as exciting as it is, it can also be scary. Suddenly, you're no longer responsible for just your work; you also need to take care of your employees, and that can be overwhelming.

With that in mind, before you even hire your first employee, you should know a thing or two about your responsibilities as an employer. You have to understand the employment rights for a worker, payroll rules, and, yes, employment taxes.

And it's the last thing that can cause you the biggest headache, as dealing with the UK tax legislation can sometimes be a nightmare. That is, of course, if you have no idea how it works. Fortunately, we're here to help.

You'll find all the information you need regarding Her Majesty's Revenue and Customs (HMRC) in the following guide. Don't worry. It's not as boring as it may sound.

Introduction to the UK Payroll

The first thing to know is that you have to run a payroll scheme every time you pay your employee and register it with HMRC. It's your duty as an employer to:

  • Record each worker's total pay
  • Calculate how much income tax and National Insurance you have to detect from each wage
  • Calculate the employer's National Insurance contribution
  • Produce payslips
  • Report the employee's pay and deduction to HM Revenue & Customs

It may seem like a lot of work to do, and frankly, it is. To speed things up (and avoid mistakes), we strongly recommend you use payroll software. Such a program will ensure you get all the numbers right without spending too much time calculating everything yourself.

PAYE and a Tax Code

PAYE, Pay As You Earn in the full name, is the system employers use to deduct an income tax from their employees' wages. Its amount depends on each employee's tax code given to you by the HMRC.

A tax code consists of a four-digit number and a letter. The number represents the tax-free income allowance, usually 10 % of the total income.

The letter indicates how much tax will be deducted from an employee's income. For instance, the letter L stands for a standard personal allowance, whereas M and N go for a marriage allowance.

Employee's National Insurance

Besides income tax, employers also have to deduct employee's National Insurance and pay it to the HM Revenue & Customs. The insurance's class depends on each worker's wage and employment status.

In the UK, we identify four main insurance classes:

  • Class 1 - paid by employees who earn more than £183 a week.
  • Class 2 - paid by self-employed people, or (voluntarily) by people who earn less than £6,475 a year.
  • Class 3 - entirely voluntary, usually paid by people who have gaps in their insurance record.
  • Class 4 - paid by self-employed earning profits over £9,501 a year.

RTI

Every time you pay your employee, you need to report it to the HM Revenue & Customs. To ensure the whole process is smooth, employers have to run it through the Real-Time Information (RTI) system.

Thanks to the RTI, HMRC knows how much tax and how many National Insurance Contributions it should expect.

Employee Expenses

Employees can use their own money to pay costs on your company's behalf. As an employer, you should be able to reimburse them. However, if you wish to pay your employee back, you may need to report it on a P11D form.

You can also use that form to report any employee's non-cash benefits you provide during a tax year. Keep in mind that there are certain expenses you might not be able to return. If that's the case, you have to add them to the payroll.

Auto-Enrolment for a Pension and Form P45

If an employee works in the UK, earns more than £10,000 a year, and is aged between 22 and the State Pension age, you must automatically enroll them into a company pension scheme.

And what if your employee has decided to leave your business? In that case, you have to produce a P45 form. If you hear the ominous music playing in your head, pause it. P45 sounds terrifying, but it's actually quite a useful tool.

In short, it ensures a worker who quits a job gets their earnings. However, before you send it to the HMRC, you need to make sure you enter the leaving date and salary correctly.

Bottom Line

It's your duty as an employer to have a general idea of employment tax rates or how to fill and send a payroll. You must also know other relevant information, including the national minimum wage, maternity pay, or student loan repayments.

Sure, you can pass the buck to your HR and accounting departments, but learning more about your workers' rights will help you become a better employer. Fortunately, as you can see, the tax system isn't as complicated as most people think.

And if you have any further questions, you can always visit the Government's official website. You should find all the missing information there.