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Hiring your first employee is an exciting time. It means that business is good enough to expand your company. While employees can help your business grow, hiring staff brings a string of legal obligations, liabilities, admin and of course, expenses. We look at the costs involved and what you need to do to stay on the right side of the law.

Confused businessman

First things first: Does your employee have the right to work in the UK?

If you’re hiring someone who is not a UK citizen, you will need to perform certain checks to ensure they’re legally allowed to be employed in the UK. If you do not do these checks or complete them incorrectly, you can face a fine of up to £20,000 for each illegal worker you employ. If you knowingly employ someone who is not legally allowed to work in the UK, you can face a jail sentence of five years.

What you need to check

You must ensure that:

  • The documents belong to the person who has given them to you and that they are genuine and original
  • The person’s visa has not expired
  • The photos look like the person and are the same on all documents
  • The person’s date of birth is same on all documents
  • The person is permitted to do the work you want to employ them to do
  • In the case where documents have a different name, the person must provide additional documents that show why it is different, such as a marriage certificate or divorce decree

Once you’ve checked all the documents and are satisfied that they meet these requirements, you must make copies and record the date that the check was conducted. These documents must be kept during the person’s employment and for two years after they have stopped working for your company.

See also: 5 accounting mistakes that put your small business at risk

The salary must meet the National Minimum Wage or the National Living Wage

UK and non-UK citizens are entitled to be paid the minimum or living wage depending on their age. Employers who do not follow these regulations can be fined by HM Revenue & Customs (HMRC).

What is the minimum wage?

The minimum wage is based on a wage per hour and is applicable to all jobs in the UK. The wage must be paid to employees who are at least school leaving age (generally 16 years of age) and under the age of 25. The amount is reviewed by the government annually in April and varies depending on the employee’s age.

This is how much you must pay in 2019:

Age

Wage

Apprentice

£3,90 per hour

Under 18

£4,35 per hour

18 to 20 years

£6,15 per hour

21 to 24 years

£7,70 per hour

What is the living wage?

The living wage applies to any worker over the age of 25 years. It is currently set at £8.21 per hour.

The city of London has its own rate (£10,55 per hour), however, this is not enforced by the government and it’s at the discretion of employers to pay that rate.

Employers’ liability insurance

As an employer, you’re responsible for the health and safety of your employees while they are at work.

Employers’ liability insurance protects your business against the cost of compensation claims should an employee be injured at work or suffer a work-related illness. It’s mandatory for every business – even if you only have one employee. You could be fined £2,500 a day until you take out the correct cover.

What does employers’ liability cover?

The moment you become an employer, you must get employers’ liability cover. This ensures your business is protected against any claims from your employees for an injury or illness suffered as a direct result of their work. For example, should an employee trip over a computer cord and injure themselves, you as the employer are liable.

Your insurance will cover the cost of settling or defending the claim.

How much does it cost?

The cost of your insurance depends on the number of employees you have and the nature of your business. The risk your employees face doing their job is also a factor – the higher the risk, the higher your premium.

You are required by law to have cover of at least £5 million from an authorised dealer. To work out how much cover you need, consider how much the most serious claim could end up costing you. It’s a good idea to speak to a specialist broker about your insurance needs.

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Employer National Insurance

This is a tax that employers are required to pay to HMRC when the payroll is calculated. Whether you need to pay insurance depends on how much your employee earns and their category letter.

Category letter

Category description

A

All employees apart from those in groups B, C, J, H, M and Z in this table

B

Married women and widows entitled to pay reduced National Insurance

C

Employees over theState Pension age

J

Employees who can defer National Insurance because they’re already paying it in another job

H

Apprentices under 25

M

Employees under 21

Z

Employees under 21 who can defer National Insurance because they’re already paying it in another job

Your National Insurance Contributions are calculated at 13.8% on earnings above £719 per month.

Category letter

£118 to £166 a week (£512 to £719 a month)

£166.01 to £962 a week (£719.01 to £4,167 a month)

Over £962 a week (£4,167 a month)

A

0%

13.8%

13.8%

B

0%

13.8%

13.8%

C

0%

13.8%

13.8%

J

0%

13.8%

13.8%

H

0%

0%

13.8%

M

0%

0%

13.8%

Z

0%

0%

13.8%

See also: Why your SME needs management accounting

Statutory Maternity and Paternity Pay

Employees are entitled to maternity or paternity pay if they take time off to have a baby.

For maternity leave, you’ll pay 90% of your employee’s earnings (before tax) for the first six weeks and £148.68 or 90% of the person’s average weekly earnings (whichever is lower) for the next 33 weeks.

For paternity leave, you must pay £148.68 or 90% of the person’s average weekly earnings (whichever is lower) for the duration of their paternity leave – which is a maximum of two weeks.

Statutory Sick Pay

If an employee is sick at least four days in a row – including non-working days – they are entitled to claim for Statutory Sick Pay. You will need to pay no less than £94.25 per week for up to 28 weeks.

Workplace pension scheme

All UK employers are required by law to put every employee into a workplace pension scheme who are aged between 22 and State Pension age and earn at least £10,000 per year. This is called auto enrolment.

The pension scheme is made up of a percentage of your worker’s pay and your contribution towards it. The total minimum contribution is 8%, with employers required to pay a minimum of 3% of that total – you can choose to pay more. The amount you and your employee pay into the pension scheme may vary depending on the type of pension scheme you have.

Choosing a pension scheme

There are many types of pension schemes available and you’ll need to choose a scheme that is set up for auto enrolment. You can choose one yourself or get help from your accountant or financial advisor.

Before deciding on a pension scheme, you must check whether it will accept all your employees, how much it will cost, if it uses the best tax relief method and if it works with your payroll.

Informing your employees

It’s a legal requirement for employers to inform their staff about the pension scheme and how auto enrolment affects them. You must do this in writing and within six weeks after your staging date, which is the date when you are legally required to enrol your employees into the scheme.

Declare your compliance

You’ll need to complete a declaration of compliance and submit it to the pension regulator. This must be done no later than five months after your auto enrolment duties begin. The pension regulator will send you a letter with your letter code and PAYE reference which you’ll need to complete your declaration of compliance.

While you have five months to complete the declaration, it’s a good idea to do it as soon as you receive your letter. You must ensure that the information you provide is correct, or you may be fined.

See also: How to get your business ready for the future

Get help where you need it most

Making the shift to becoming an employer can be daunting. There are a lot more things to keep track of and the last thing you want is for something to fall through the cracks or to miss a deadline.

A good accountant does more than just ensure your staff is paid on time and that your taxes are filed. They can offer advice and insight that can help you make better business decisions and steer your company towards success.

Look for accountants that offer comprehensive accounting services. They can advise you on the correct structure of your UK company, help with your payroll and ensure you meet all your filing deadlines.


We offer a range of accounting services for SMEs. Chat to our accountants about how we can match our services to suit your needs at accounting@sableinternational.com or on +44 (0) 20 7759 7553.

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