- A Guide to Paying Staff
- Paying Staff: Payments to HMRC for PAYE
- Paying Staff: P11D and Taxable Benefits
- Paying Staff – How to get help with HR
- Paying Staff – Every business owner has at least one tale of a bad hire – and usually more than one!
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A Guide to Paying Staff
“Excellence is not a skill; it’s an attitude.”
One of the biggest costs that most businesses face is the cost of employees. It’s not just the cost of salaries that need to be accounted for, but a wide range of extra benefits often offered such as medical insurance, company vehicles and pensions.
When a small business starts to take on staff for the first time, they are often not aware of the impact of payroll taxes both in terms of the extra costs (Employers National Insurance contributions) and in the timing of payments to staff (net wages) and HMRC (PAYE and NIC).
As you can see, there is different vocabulary used for employee costs.
When employing someone, you may have heard those costs called salary and “on-costs”.
What are “On Costs”?
On-Costs are the additional costs of employment as specified in an individual contract.
You offer Sarah a job as a Sales Rep, and you are paying her £30,000 plus a car allowance of £400 per month, pension contributions of 3% and workplace medical insurance. The costs of employing Sarah are:
Salary £ 30,000 £ 2,500
Pension contributions £ 900 £ 75
Car Allowance £ 4,800 £ 400
Employers National Insurance £ 3,800 £ 317
TOTAL £ 39,500 £ 3,292
NOTE: National Insurance Contribution is 13.8% of taxable earnings over £8,164 (for 2017/18 tax year – this changes every year in April).
Many benefits such as medical insurance are also counted as taxable leading to further taxes as part of the year-end reporting of payroll – see the section on P11D.
Paying Staff: Payments to HMRC for PAYE
When payroll is calculated, the salary of employees is used as the basis for assessing the amount of tax and National Insurance Contribution the employee pays as well as the amount of National Insurance the employer pays.
Tax (called PAYE – which stands for Pay As You Earn) and NIC (National Insurance Contributions) are deducted from the employee’s salary which leaves NET PAY, the amount the employee receives in their bank account.
The PAYE and employee NIC is added to the Employers NIC and paid over to HMRC, generally on the 19th day of the month following the employees’ pay date. This means that the total cost of employment is made in two payments – one to the employees and one to HMRC. This timing difference is shown in the cash flow statement and also in any cash flow forecast.
Paying Staff: P11D and Taxable Benefits
When salaries are higher the tax burden increases, and it would be tempting to pay lower salaries and provide valuable benefits to employees as a way of reducing employment tax costs. In my time, I have seen everything from luncheon vouchers, salaries partially paid in Tesco vouchers through to paying for gym memberships and holidays!
Over the years, the government have closed many of the benefit loopholes and made the payment of cash alternatives taxable.
As the value of some benefits could not be added to wages in each month, there is an annual statement of end of year expenses and benefits called P11D. This requires employers to list the benefits provided to their employees – and applies a tax to the total, which then must be reported to HMRC by the 5th July (and paid by 19th July).
“Always treat your employees exactly how you want them to treat your best customers.”
Stephen R Covey
Examples of cash equivalent benefits include (but is not limited to):
- Personal purchases
- Medical Insurance
- Professional fees, membership dues
- Living Accommodation
- Cars and car fuel
- Interest-free or low-interest loans
- Relocation expenses (generally over a certain value)
- Mileage allowances (where paid at a higher rate than the HMRC approved levels).
In the example earlier of Sarah, the cost of her medical insurance is £2,400 per year plus £331.20 additional National Insurance contribution (as at 2017/18 rates). This needs to be considered when calculating the overall costs of employment.
Paying Staff – How to get help with HR
While managing staff is outside the scope of this book; I do think it’s worth a few words.
A lot of business owners find Human Resource Management (commonly called HR) and managing staff can be quite scary – there is a lot of legislation to keep on top of.
While it can be a minefield, especially when there is a problem, there is plenty of help on hand without having to take on entire HR departments and additional costs.
With the advancement of technology, even small businesses can access an entire HR function at the touch of a few buttons or by picking up a phone.
When you get the right team working in your business, then you can start to see the possibilities and take advantage of opportunities that may have previously seemed daunting. Get it wrong and you can end up in a maze of employee tribunal threats and other red tape.
Paying Staff – Every business owner has at least one tale of a bad hire – and usually more than one!
Don’t try and deal with HR on your own – get the experts in, they can save you thousands and make sure you get the outcomes your business needs.
“You can’t teach employees to smile; they have to smile before you hire them.”