To add a new employee to your company payroll, you must obtain certain information about the individual and register their details with HMRC when you pay them for the first time. This post explains the steps you need to take to do this and ensure that you make the correct deductions from their wages or salary.
Steps required when you hire a new employee
When you hire your first employee, you will need to register as an employer with HMRC and set up payroll. This applies even if you are only employing yourself as the sole director of your own limited company.
In most cases, you will also need to set up Pay As You Earn (PAYE) to run as part of your company payroll. We provide detailed guidance on these important first steps in the following blog posts:
Once everything has been set up, you can add a new employee to your company payroll. Whether you are hiring your first member of staff or bringing in additional employees to meet the demands of your growing business, there are five steps you must take before you can start paying them.
Step 1 – Check if you need to pay them through PAYE
Generally, you will have to pay your staff through PAYE if they earn at least £123 a week (£533 a month; £6,396 a year). This includes full-time and part-time employees, temporary and seasonal workers, certain agency workers, students, and company directors.
Different rules usually apply if you pay subcontractors to do construction work. However, you must check if you should be employing them instead of subcontracting the work, and paying them through the Construction Industry Scheme (CIS).
Step 2 – Obtain information about the new employee
When you hire a new employee or worker, you will need to obtain certain information from them to work out their tax code and set them up in your company payroll software. The employee details you require are as follows:
- Full name
- Date of birth
- Full address
- Start date in your company
- Leaving date from their previous job
- Total pay and tax paid to date for the current tax year
- Student Loan deduction status
- National Insurance number
- Existing tax code
You can get most of this information from the employee’s P45. If they do not have one, or they left their last job before 6 April 2022, they will need to complete HMRC’s starter checklist. This replaced the P46 form.
If your employee has more than one P45, you should use the P45 with the most recent date. Return the other one to the employee.
If both P45s have the same leaving date, you should use the one with the highest tax-free allowance (or the least additional pay, if their tax code starts with a ‘K’). Return the other P45 to the employee.
When you have all of the required information about your new employee, you can use HMRC’s online tool to:
- work out their tax code and starter declaration
- find out what else you need to do before paying them for the first time
You must keep all of this information in your payroll records for the current tax year and the following three tax years.
Step 3 – Find out if the employee needs to repay a student loan
As an employer, you must make student loan and postgraduate loan deductions from employees’ wages if any of the following apply:
- Their P45 shows that deductions must continue
- They tell you they are repaying a student loan and/or a postgraduate loan
- HMRC sends you form SL1 or form PGL1, and your new employee’s earnings are over the income threshold for their repayment plan
If they have a loan to repay, you should record this in your payroll software. The software will calculate their loan recovery payments, so there is no need for you to work this out yourself.
However, if the employee completed their studies after 6 April in the current tax year, their loan repayments will not start until the next tax year.
When you pay the employee, you must report any loan deductions to HMRC by including the information in a Full Payment Submission (FPS).
Step 4 – Set up the new employee in your payroll software
Using all of the information you have obtained, the next step is to create an employee record in your payroll software.
The way in which you do this will depend on the software you have, so you will need to refer to the user guidance if you run payroll yourself.
If you outsource to a payroll service provider, you will simply provide them with the new employee’s details and they will add them to your company payroll.
Step 5 – Register the employee with HMRC
The final step is to register your new employee with HMRC. You do this by including their details in a Full Payment Submission (FPS) when you pay them for the first time.
You will need to include the following details on the FPS:
- All of the information you have collected from them, as outlined in Step 2 above
- Their tax code and starter declaration
- Their pay and deductions since they began working for your company. These include (where applicable) Income Tax, National Insurance contributions, student loan and postgraduate loan repayments, pension payments, and child maintenance
You must assign a unique payroll ID to every new employee, even if they have worked for you before, or they have more than one job in the same PAYE scheme.
There are special rules for making payroll deductions for the following employees or workers:
- Female employees who are entitled to pay reduced National Insurance
- Employees who you only pay once or who are seconded from abroad
- Casual employees who work outdoors as harvest workers and casual beaters for a shoot
- Certain employees who have more than one job
If any of these apply, refer to HMRC’s guidance in the links above to find out what you need to do when you add a new employee to your company payroll and make deductions from their earnings.
Thanks for reading
Being an employer is a big responsibility. It’s important to be aware of your obligations and ensure that all employees and workers are paid correctly.
This includes obtaining and entering employee information in your company payroll, registering their details with HMRC when you pay them for the first time, and making all necessary deductions from their wages or salary.
If you have any questions about the topic covered in this post, or need help with any other aspect of setting up and running a limited company, please comment below or contact our company formation team.