For the latest tax rates, thresholds and allowances, please refer to our Tax Rates Card (link to page where you’ll find tax rates pdf). These figures change regularly, so this guide focuses on the principles rather than specific amounts.
It’s easy to forget that even if you’re a director of your business, you’re still treated as an employee for tax purposes. This means directors, just like their staff, can be affected by the taxes outlined below.
In many cases, it’s possible to structure how you take income from your business in a tax-efficient way – for example, by balancing salary and dividends. The right approach will depend on your individual circumstances.
If you employ staff, there are several key taxes and responsibilities to be aware of.
National Insurance
One of the main taxes when employing staff is National Insurance Contributions (NICs).
- Employers are generally required to pay Class 1 NICs on employees’ earnings above certain thresholds.
- Different rules can apply depending on factors such as the employee’s age or circumstances.
There are also additional classes of NIC to be aware of:
- Class 1A NIC – typically applies to benefits in kind (such as private medical insurance).
- Class 1B NIC – applies where benefits are provided under certain arrangements agreed with HMRC.
Some benefits can be provided tax efficiently, such as certain low-value or workplace-related benefits.
Employment Allowance
Many businesses can reduce their employer NIC liability through the Employment Allowance, subject to eligibility conditions.
- This is available to many businesses with employees and businesses with multiple directors (Subject to qualifying criteria).
- It cannot be used against all classes of NIC, so it’s important to understand where it applies.
PAYE and Employee National Insurance
PAYE (Pay As You Earn) is the system used to collect income tax and employee NIC through payroll.
- Employees pay income tax and NIC on their earnings, which the employer deducts at source.
- Tax rates and bands vary depending on income level and, in some cases, location within the UK.
- Different rules may apply for individuals who have reached State Pension age.
- Tax deductions are driven by employee tax codes and employers should refer employees to HMRC regarding tax code queries.
As an employer, you are responsible for:
- Calculating the correct deductions and reporting these each pay period via an FPS.
- Paying these amounts over to HMRC on time.
- Keeping accurate payroll records.
- Notifying HMRC of any statutory payments that can reduce your overall liabilities (such as SMP, SPP, SAP) via an EPS. Employers can claim back 92% of the value of statutory payments and small employers could be eligible for small employers relief (Eligibility criteria applies), which entitles them to claim 109% of the value back by reducing their overall liabilities in the month . SSP is not included and cannot be reclaimed.
Failure to do so can result in penalties.
Payment deadlines
Amounts collected through PAYE must be paid to HMRC by the required deadline each month.
- Payments are due by the 19th of the following month for cash/cheque payments and 22nd for electronic payments. Large companies with over 250 employees are required to pay electronically
- Missing deadlines or paying incorrect amounts can lead to interest and penalties.
Other considerations
There are additional responsibilities when employing staff, including:
Workplace pensions (auto-enrolment)
Eligible employees must be automatically enrolled into a pension scheme, with minimum contribution levels required from both employer and employee.
Family members as employees
If employing a family member, it’s important that their salary reflects a genuine commercial rate for the work they do. Excessive payments could still be subject to tax.
General compliance
Employers must ensure they meet all HMRC requirements, from reporting to record-keeping.
Getting payroll and tax right from the outset can save you time, cost and stress. If you’d like support or advice tailored to your business, get in touch with our team on +44 (0)330 024 3200 or hi@hhllp.co.uk.