• Home
  • >
  • Blogs
  • >
  • Tax Implications of Employing Staff in The UK for Your Business

Tax Implications of Employing Staff in The UK for Your Business

Published by UK Property Accountants
Posted Date: August 8, 2023 , Modified Date: May 8, 2024

As a business owner in the UK, employing staff is a significant milestone that comes with various responsibilities, including understanding the tax implications involved.

Navigating the intricacies of business tax accounts, National Insurance contributions, PAYE (Pay As You Earn), and the benefits of Employment Allowance is crucial to ensure compliance and make informed decisions.

In this article, we will explore the tax considerations and obligations that arise when employing staff in the UK, providing valuable insights to help you manage your business tax account effectively and optimise tax efficiency.

Tax Implications of Employing Staff in the UK

Picture this: as an employer in the UK, you carry the responsibility of collecting and paying taxes to HMRC. But here's the insider tip: remember even the director of your business is considered an employee. So, buckle up as we dive into the captivating world of UK tax obligations for employers.

Understanding The UK PAYE System

This intricate system ensures that employers collect taxes on behalf of the employees from their wages of their hard work and pay them to HMRC. Want to crack the code?

The employee's tax code holds the key to calculating monthly tax deductions, whether through specialised payroll software, a trusted provider, or HMRC's 'Basic PAYE Tools.' Brace yourself for real-time information reporting—a game-changer in the PAYE landscape.

Due Date for Payment of PAYE

Mark your calendar—PAYE is due 17 days after each tax month's end if you're making electronic payments. If you prefer the traditional route, you have 14 days after the month's end to settle the bill.

Pro tip: for those with an average monthly tax and NICs due under £1,500, quarterly payment is an option. And if you're a big player with 250 or more employees, electronic payments are a must.

Year End Procedures

As the tax year draws to a close, it's time for the grand finale—year-end procedures. Prepare yourself for two star players: P60 and P11D.

P60

  • The employer provides the employee with a P60 if they earned at or above the lower earnings limit for National Insurance purposes. It must be given no later than 31 May following the end of the tax year. The employee uses the details on the P60 for their own self-assessment tax return. It includes information such as taxable earnings, tax deductions, NIC deductions, and basic details.

P11D

  • Form P11D is completed and submitted to HMRC when an employee has received taxable benefits that weren't subject to tax via payroll. It contains details of the cash equivalent of each benefit provided. The deadline for submitting P11D forms to HMRC is 6 July following the end of the tax year.                                                                                                                                                                                                     

National Insurance Contribution (NIC)

NICs serve the purpose of providing retirement benefits such as the state pension and funding social security benefits. There are six classes of  National Insurance Contribution (NICs):

Image of National Insurance Contribution

Class 1 NICs

Class 1 NICs is paid by both employees (primary contributions) and employers (secondary contributions) on earnings from employment. These contributions are accounted for under the PAYE system and are paid over to HMRC, along with income tax, on the 22nd of each month where payment is made electronically (otherwise on the 19th).

What does earnings in National Insurance contribution (NIC) include?

Earnings include the following:

  • Cash payments (other than reimbursement of genuine business expenses).
  • Payments in kind that can be surrendered for cash.
  • Readily convertible assets.
  • Settlement of employee’s personal liability.
  • Vouchers (except childcare to the extent it does not exceed the exempt amounts).

How do we calculate the class 1 NIC?

Class 1 primary NIC:

The calculation is done based on the earnings for employees. (Below is rate for the tax year 2023/24)

For first £242 per week there is no class 1 primary NIC

From £242 to £967 per week class 1 primary NIC is paid at 12%

For earnings above £967 per week class 1 primary NIC is paid at 2%

Calculation and Maximum Amount of Primary Class 1 NICs

The calculation of primary Class 1 NICs is based on earnings from employment.

  • If an individual has multiple employments, the NICs are calculated separately for each employment. However, there is a maximum payable amount, and any excess paid will be refunded. This maximum amount ensures that individuals with multiple employments do not pay more NICs than someone with a single employment earning the same amount.
  • The maximum amount varies depending on the combination of employments and earnings. Individuals who anticipate paying excessive NICs can request to defer payment of some contributions, with primary Class 1 NICs being deducted at a rate of 2% (for the tax year 2023/24) above the primary threshold, while secondary contributions remain payable as usual.

Class 1 secondary NIC

Class 1 secondary NIC are payable at 13.8% (for the tax year 2023/24) on excess of earnings above £175 per week.

Class 1A NICs

Paid by employers on certain taxable benefits and taxable termination payments exceeding the £30,000 exemption. It is charged at the employer's rate of 13.8% (for the tax year 2023/24). Class 1A NICs do not apply to benefits already subject to Class 1 secondary NICs or Class 1B NICs.

Where payment is made electronically the deadline for Class 1A NICs is 22 July following the tax year.

Where payment is not made electronically the deadline for Class 1A NICs is 22 July following the tax year.

The amount of class 1A NICs is notified to HMRC through form P11D.

Employment Class 1 National Insurance Calculator

Try out our exclusive National Insurance Calculator. Make your work easier while setting up payroll of your staffs.

Class 1B NIC

Class 1B NIC is paid by employers only on PAYE Settlement Agreements (PSAs).

PSA enables the employer to settle the employee's tax responsibility for small or occasional payments related to benefits and expenses.

Class 2 NIC

Class 2 NIC is paid by self-employed to qualify for benefits such as state pension.

It is paid on flat rate on a weekly basis. For tax year 2023-24 the rate payable for class 2 NIC is £3.45 per week.

Most people pay the contributions as part of self-assessment tax bill.

Class 3 NIC

Class 3 National Insurance Contributions (NICs) are optional payments made by taxpayers who want to supplement their contribution history, ensuring they maintain eligibility for state benefits.

There are several reasons why you might consider making voluntary contributions:

  • If you are nearing State Pension age and lack sufficient qualifying years to receive the full State Pension amount.
  • If you anticipate that you won't be able to accumulate the necessary qualifying years for the full State Pension during your working years.
  • If you are self-employed, file Self-Assessment tax returns, and are exempt from paying Class 2 contributions due to low profits.
  • If you reside outside the UK but desire to be eligible for certain benefits.
Concept of national insurance contributions UK

Class 4 NIC

Class 4 NIC is paid by self-employed persons on the profits from their trade.

Rates for tax year 2023/24 is 9% on profits between £12,570 and £50,270; 2% on profits over £50,270.

Benefits of Employment Allowance

  • Eligible employers can reduce their secondary Class 1 NICs bill by up to £5,000 per tax year. If the NICs liability is lower than £5,000, no payment is required. Unused relief cannot be carried forward.
  • Sole traders, partnerships, and companies can claim the allowance. To be eligible, the previous year's NICs liability must be under £100,000 for the employer or the group of companies. Only one company in the group can claim the allowance.
  • The employment allowance contributes to the de minimise State Aid limit over three years. If claiming the full allowance exceeds the threshold, it cannot be claimed.

Conclusion

Employing staff in the UK entails various tax considerations and obligations that must be effectively managed. Understanding the UK PAYE system, calculating and maximising NICs, and being aware of the different classes of NICs are vital for compliance.

Additionally, the Employment Allowance can significantly reduce secondary Class 1 NICs for eligible employers. By staying informed about these tax implications and obligations, you can navigate the complexities of employing staff and optimise tax efficiency for your business.

Take Charge of Your Business's Tax Journey Today

Don't let the complexities of employing staff in the UK hold you back. Our tax advisor is here to support you every step of the way. We provide payroll services for business of all sizes and Industries. 

UK Property Accountants
Our Complete Guides
Related Posts

Confused where to start?

Book our Free Discovery Call

Please wait while the page is loading
Current Progress
Current Progress

15 minutes

Choose your preferred date and time

Discuss your business goals, challenges and requirements.

How Our Discovery Call Works

Please wait while the page is loading
Current Progress
Current Progress

Discovery Call

Proposal

Onboarding

Success message!
Warning message!
Error message!