Employing People for Your Business. The Basics

A young woman signs a contract while a casually dressed young man sits beside her, smiling in a modern office setting.

Starting a business is exciting, and as it grows, you might find yourself needing an extra pair of hands. But how do you go about bringing someone on board? It can seem a bit daunting, especially with all the rules and regulations. Let's break down the basics of employing people in the UK, looking at a couple of common scenarios, using a small local cleaning company as our example.

Scenario 1: From Self-Employed to Limited Company and Registering for PAYE

Imagine you run a successful cleaning business as a sole trader, "Sparkle & Shine Cleaning Services." You've been doing all the cleaning yourself, but demand is growing, and you're turning down jobs. It's time to hire your first employee!

If you're currently self-employed and decide to form a limited company (Ltd) to grow your business, you'll need to register for Pay As You Earn (PAYE). PAYE is HMRC's system for collecting Income Tax and National Insurance from employees' wages.

Steps to take:

1. Form a Limited Company: This is a legal structure that separates your personal finances from your business finances. You can do this through Companies House.

2. Register for PAYE: Once your limited company is set up, you'll need to register it with HMRC as an employer. This tells them you'll be paying employees and need to operate PAYE. You can do this online through the HMRC website.

3. Get Employer's Liability Insurance: This is a legal requirement for most businesses with employees. It protects you if an employee gets injured or becomes ill as a result of working for you.

4. Prepare Employment Contracts: These are legally binding documents outlining the terms and conditions of employment for your new cleaner.

5. Set up a Payroll System: You'll need a way to calculate wages, deduct tax and National Insurance, and pay your employee. This can be done manually, with payroll software, or by using a payroll service.

   
   

Scenario 2: Limited Company Using Subcontractors

Now, let's say "Sparkle & Shine Cleaning Services" is already a limited company. You've got a few regular cleaners on your payroll, but you've just landed a huge contract for a one-off deep clean of a large office building. This is a big job, and you don't want to take on permanent staff for something that might not be a regular occurrence. This is where subcontractors can be a great option.

A subcontractor is essentially another business or self-employed individual you hire to do specific work for you. They are not your employees; they are responsible for their own tax and National Insurance.

Steps to take:

1. Determine if they are genuinely self-employed: HMRC has strict rules about who can be considered self-employed. You need to ensure the subcontractor is genuinely running their own business and not just working for you as if they were an employee. Factors include:

   • They work for multiple clients.

   • They provide their own equipment.

   • They can send a substitute to do the work.

   • They have control over how they do the work.

2. Agree on a Contract for Services: This is different from an employment contract. It outlines the specific work to be done, the fee, and the timeframe.

3. Verify their self-employed status: It's good practice to ask for proof of their self-employed status, such as their UTR number.

4. Pay their invoices: You'll pay them for their services, and they will be responsible for their own tax and National Insurance contributions.

   
   

Employing people, whether as direct employees or subcontractors, can be a fantastic way to grow your business. Understanding these basic approaches will help you make informed decisions and ensure you're complying with UK regulations.

Seeking Expert Guidance:

Navigating the complexities of employment law and tax can be tricky. This is where external help, such as a business consultancy like Blue Bee Partners, can be invaluable. We can provide expert advice on setting up PAYE, drafting contracts, ensuring compliance with HMRC rules, and helping you determine the correct status for your workers (employee vs. subcontractor). This can save you time, stress, and potential costly mistakes so if you are planning on expanding your business, don't hesitate to contact us - we will happily go on this adventure with you!