Setting up as an employer: a step-by-step guide to payroll processing and compliance

Running your own business is challenging enough, so if you are looking to expand and take on staff for the very first time, there are several key things that you need to consider when setting up as an employer.

In this guide, we look at the importance of complying with the relevant legal obligations when it comes to payroll processing and employing people. Not only is it important to understand the duties placed on you but doing it the right way will help to maintain good relations with your employees.

Registering as an employer

When you start employing staff, you will need to register with HM Revenue and Customs (HMRC) online – you must register even if you are only employing yourself.

You will need to determine whether you are employing people, or if they are classed as self-employed. There is a handy tool available on the government’s website to help decide this. There are distinct differences between being employed and self-employed and it is important to ensure compliance.

The government also provides a useful guide to registering as an employer and a step-by-step process for employing staff, as well as a whole section which covers payroll for employers.

Registering for PAYE or Pay As You Earn follows on from registering an HMRC business account, which can be for self-employed individuals to large businesses. You will receive an Employer PAYE Reference Number (ERN) once you have enrolled.

If your staff are earning below £123 a week and do not have any other income or employment, then there is no obligation for PAYE, however, you must keep records of payments and signed starter checklists by each employee.

If any one employee breaches this amount or has other employment or income, then a PAYE scheme is required for ALL employees – even those below the threshold will need to be processed using RTI (Real Time Information).

Familiarise yourself

It is a good idea when you are setting up your scheme to familiarise yourself with the payroll process and understand what is needed from you as an employer. Get to know the requirements – holiday rights and entitlements, and statutory payments such as sickness and maternity. There may also be a student loan that needs deducting and remitting.

As well as these, there could be deductions necessary for Attachment of Earnings Orders (AEOs), where employees are due to make payments authorised by a government body for such things as child support, overstated benefits, fines or damages, or unpaid council tax, for example.

Each of these has their own legal obligation – there is a lot to consider as an employer and calculating payroll accurately is crucial.

Make sure that you have all the relevant personal information you need about your employees to be able to enter onto your system and pay them, including their bank account details. A new starter checklist is always a good idea to ensure you have covered everything. This information should be submitted to HMRC so they can check their records and ensure the correct tax and National Insurance contributions are paid.

If your employee has a P45 they should provide this to you. If not, then they are asked to tick one of three options on your starter form, which will determine their accurate tax code, and this would be applied to their record. Once this is submitted to HMRC, they will determine whether it is correct or whether there needs to be an adjustment. You should also stay updated on any changes to tax bands and rates.

There are many different payroll software platforms available on the market – some are free to use, and some have a charge, but employers will find a suitable and reliable programme to help them master the payroll process.

Duties for workplace pensions

Once you are set up and your first submission is created, it automatically triggers your enrolment duties for workplace pensions. You must follow this guidance to ensure that you are compliant with the pensions regulator. They would write to you and advise you of your duties as an employer.

Only eligible employees need to be enrolled (anyone earning more than £10,000 per year on a non-cumulative basis). However, you are still required to carry out your duties in respect of the declaration of compliance. Only director-only payrolls (where a director has no employment contract) can remove their duties by contacting the pensions regulator. The declaration of compliance is completed with each enrolment period (every three years) and is the final stage of compliance within the workplace pension duties.

The employee has a choice as to whether they opt-out with the pension provider if they do not wish to be a part of the scheme. Anyone who has opted out of the pension previously will need to be re-enrolled in the scheme every three years – again this is a legal requirement.

Once enrolled, pension payments can be deducted from the employee’s pay, alongside tax and National Insurance.

Ongoing changes

Payroll processing is ongoing and it’s not a one-time task – if you are processing on a weekly basis then you will need to ensure you are doing this consistently and submitting for payment on or before the agreed payday – this is a requirement by HMRC. You will need to make sure payments to the pensions provider are made in a timely manner, so you are keeping up to date with your taxation obligations.

You will need to provide your employees with their payslips with all the information about their pay and deductions and submit Real-Time Information (RTI) to HMRC.

Don’t forget that tax bands and rates often change each tax year, however, this is determined by government. In some circumstances, they can be changed during the tax year.

Another key thing to remember is reporting any new staff hired, anyone who leaves the business and of course, changes in employee details. Maintain accurate records and keep them safe and secure.

Specialist help and advice

Our specialist payroll team can help guide you through the whole process of setting up as an employer for the first time.

We’re here to help streamline your payroll processes, and the team at Westcotts is on-hand to set up your systems and make sure you meet your legal obligations as an employer.

For more help and advice contact a member of the payroll team.

Written by Jake Elms

July 4, 2023

Category: Blog

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