As an employer in the UK, you must collect and pay UK employment tax to HM Revenue & Customs (HMRC) on the gross wages you pay your employees. This includes income tax and National Insurance Contributions (NIC).
It’s important to note that even if you are a director of your own business, you are considered an employee and may be subject to employment tax. However, as a director, you may be able to structure your income from the business in a more tax-efficient structure. Instead of taking a salary, you can pay yourself in dividends, which are taxed at a lower rate of 7.5% compared to 20% for salary.
Regardless of how you structure your own compensation, you must be aware of and properly account for the employment taxes that apply to the people you employ. Failure to do so can result in penalties and other issues with HMRC.
Employment Taxes- What are They?
Employment taxes refer to the taxes and deductions employers must withhold and pay when they have employees.
If you employ people in your business, you must register and operate a payroll system; in such circumstances, you must deduct income tax and national insurance (NICs) from your employees’ paychecks and pay it to HMRC. Additionally, you will need to pay your own portion of NICs.
Employment tax also applies to certain benefits, such as company cars, private health insurance, and travel or entertainment expenses.
National Insurance Contributions
Employers and employees are legally required to pay Class 1 NICs. This also ensures staff eligibility for some benefits, such as the state pension, which are dependent on the NICs they pay across their working life.
There are a few different classes of National Insurance - Employee NIC rates will vary based on these. Class 1 National Insurance is the most widespread type and involves two contributions – a primary one from the employee and a secondary one from you, the employer.
Class 1A NICs become payable when you provide staff with benefits such as private medical insurance. Class 1B becomes payable when you have an agreement with HMRC to provide certain benefits to employees without the employees being liable to tax on the benefit.
Employees pay primary NIC on all earnings over £242 per week, £1,048 per month or £12,570 per year (2024/25 tax year).
Additionally, the employer must pay secondary NIC for employees who earn above certain income thresholds. For the 2024/25 tax year, these thresholds are £175 per week, £758 per month or £9,100 per year. Employers must pay this payroll tax for all employees whose incomes exceed those amounts.
Currently, businesses pay NIC at a rate of 13.8% on employee earnings above the annual £9,100 threshold. However, the government plans to increase this rate to 15% in April 2025. Additionally, the threshold will be reduced to £5,000, significantly increasing employers’ NIC liabilities.
The employee’s contributions are deducted from their pay, with the amount deducted (as well as how much you have to pay) depending on the employee’s earnings. Once employees reach state pension age, they are no longer liable to pay Class 1 NIC.
Income Tax
Under the PAYE (Pay As You Earn) Scheme (see below), employers must deduct income tax from their employees’ incomes. The amount of tax deducted is determined by factors such as their income level, their eligible personal allowance (determined by their tax code) and the region in which they work. For the 2024/2025 tax year, the basic rate is 20%, which applies to annual earnings between £12,571 and £50,270. The higher rate is 40% and is paid on earnings between £50,271 and £125,140. The additional rate of income rate of 45% is paid on all earnings above £125,140 a year.
Most UK employees will receive a personal allowance of £12,570. As a result, they won’t have to pay tax on the first £12,570 of their annual earnings.
Employment Allowance
The Employment Allowance is a government initiative that enables eligible small employers to lower their national insurance liability by up to £5,000 annually. Starting in April 2025, the government is increasing the threshold to £10,500 to support smaller businesses with employment costs. As a result, you will pay less Employers’ Class 1 NI each pay period until the tax year ends or the allowance is used up, whichever happens first. It is important to note that employment allowance does not impact the amount your employee contributes.
To be eligible, you must:
- run a business or charity,
- have had Employers’ class 1 NI liabilities of less than £100,000 in the previous tax year and
- Have at least one employee earning more than the Class 1 NI secondary threshold. However, you cannot claim employment allowance if your company has just one director and that director is the only employee liable for secondary Class 1 NIC.
Once the allowance limit is reached, the business must pay any remaining NI to HMRC.
What is PAYE?
PAYE, which stands for Pay As You Earn, is the scheme that allows employers to deduct monthly income tax and national insurance contributions straight from their employees’ salaries. In other words, employees receive a net amount for their income and don’t have to pay any further tax unless they receive additional income and need to complete a self-assessment.
Registering for PAYE
As an employer, you need to register for PAYE if any of the following applies to an employee in the current tax year (since 6 April):
- they are paid £123 or more a week
- they receive expenses and company benefits
- they receive pension contributions from the company
- they have another job
- They have received certain benefits such as jobseeker’s allowance, employment and support allowance or incapacity benefit.
Even if they don’t fulfil any of these criteria, you must still keep suitable records and a full payroll history.
Employer Tax-Related Obligations
As an employer, you have certain tax-related obligations. Firstly, you must pay employer NI contributions and make appropriate deductions from employees. You are required to provide each employee with a payslip detailing the tax and NIC deductions taken. If an employee suspects you are not correctly deducting tax or NIC from their wages, they can report you to HMRC.
Additionally, by 31 May each year, you must provide all employees with a P60 outlining their total gross pay and the total amount of tax and NIC deducted over the previous tax year.
Payments and Deductions
When paying your employees through payroll, you will also need to make deductions for PAYE. In addition to an employee’s salary or wages, any bonuses, tips, or statutory payments such as sick or maternity pay will also count as a payment. You will, therefore, usually need to deduct tax and NIC from these, too.
Before an employee’s wages can be paid, any deductible amounts are subtracted. The deduction amount depends on factors like the employee’s tax code, their National Insurance category letter and their earnings. Pension contributions, student loan repayments, and child maintenance payments can also impact the total amount that must be deducted from an employee’s paycheck.
Reporting to HMRC
Your payroll software automatically calculates the tax and National Insurance (both employee and employer) owed on each employee’s weekly earnings.
You must report payroll data to HMRC electronically each time you pay your employees. This is known as Real Time Information (RTI). Previously, submissions to HMRC were only required at the end of the financial year.
You can also report any changes that occur regarding your employees, such as when a new employee joins or if an employee reaches state pension age, to HMRC via RTI submissions.
Keeping Accurate Records
As an employer, you must maintain detailed records of any payments to employees and deductions made. Comprehensive records should be kept for at least three years.
PAYE Payment Deadlines
You should ensure that your PAYE bill is paid to HMRC by the 22nd of the next tax month if you pay monthly. If you pay quarterly, the amount must be paid by the 22nd after the end of the quarter.
If you do not make payments on time or make any errors, HMRC may charge interest or penalties.
What is Small Employer Relief and How Do I Qualify For It?
If you are classified as a small employer, you will be able to claim back 100% (plus a further 3%) of any statutory payments made to employees, including maternity, paternity, adoption, bereavement and shared parental pay.
To qualify, your total NI contributions (both employer and employee) in the previous tax year before the employee’s qualifying week for leave must have been £45,00 or less.
Even if you do not meet the requirements to qualify as a ‘small employer’, you can still claim back 92% of statutory payments made. To reclaim the correct amount, deduct that sum from payments you owe to HMRC.
Checking Employment Status for Tax
Self-employed workers are responsible for paying their own income tax and NIC. As such, it is crucial to understand whether a worker is truly self-employed or should be classified as an employee.
The following factors generally indicate self-employment:
- the individual can choose the work they do, as well as when and how to do it
- they can hire someone else to complete the work
- they are responsible for fixing any sub-standard work on their own time
- they are paid a fixed price for the work regardless of how long it takes
- they provide their own tools and equipment
- they can work for multiple clients.
If you are unsure about a worker’s employment status, you can use the government’s tool to make an assessment.
Other Things to Consider
When employing staff, it is important to be aware of additional responsibilities, such as pension auto-enrolment. Employers must auto-enrol employees aged twenty-two or over and earning at least £10,000 per year into a pension scheme. As an employer, you will need to contribute a minimum of 3%, while the employee will have at least 5% deducted from their salary. Employees can choose to opt out of the pension if they wish.
Another consideration is the salary you pay family members. You should ensure you are offering a market-rate salary that aligns with their role and the hours they work within the business. If the salary is above market rate, you may end up being taxed on the income yourself.
How We Can Help
We understand that UK employment tax can be complex and a little daunting for small businesses; however, our experienced team of employment law specialists is on hand to help you navigate these complexities. We can assist you with day-to-day employment tax queries, ensuring compliance with the relevant legislation and minimising the risk of an HMRC challenge. Please get in touch by calling on 0300 303 2071 or emailing us.
