As a self-employed individual, you’re already used to handling your taxes. This means understanding the types of National Insurance contributions you have to pay.
However, as a director, you’re likely to also be an employee of your limited company, and you may also employ staff, which means you have certain tax implications to consider that you may not have thought of before. Gorilla Accounting are contractor accountants, so we can tell you all you need to know about taxes when you’re an employer.
Usually, when you become an employer, you have to incorporate PAYE in your payroll, as this is how HMRC collects income tax and National Insurance contributions from employment.
This is true whether you’re a sole trader or a limited company owner. Sole traders can continue working for themselves without having to set up a company.
While you have to keep payroll records, you don’t have to register for PAYE if your employees are paid less than £120 a week, don’t receive expenses or benefits, don’t have another job and don’t get a pension.
In regard to the records you have to keep, you must record what you pay your staff and the deductions you make, any employee leave and sickness absences, tax code notices, taxable expenses or benefits, Payroll Giving Scheme documents, and payments you make to HMRC.
These records have to be accurate, of course, and you must keep them for 3 years. If you don’t, you risk a penalty of up to £3,000, as HMRC will simply estimate how much you have to pay.
The way PAYE works is that you have to make deductions for PAYE when you pay your staff. Payments to employees include wages but also bonuses and things like maternity pay and statutory sick pay.
The PAYE bill that you’re responsible for paying may include the following:
Income tax deductions
Class 1 and 1B national Insurance
Class 1A National Insurance on work benefits (like a company phone) or on termination awards (if you haven’t paid Class 1 contributions) – this is paid separately
Student loan repayments
Construction Industry Scheme deductions
There are some important deadlines to keep in mind when it comes to PAYE, as you have to pay the bill to HMRC by the 22nd of the next tax month if you pay PAYE monthly, or the 22nd after the end of the quarter if you pay quarterly.
You must register as an employer when you hire staff for the first time, even if you’re the only employee of your company (as its director). It’s important that you register before the first payday and it can take up to 5 working days to receive your employer PAYE reference numbers.
Employers pay National Insurance contributions on the earnings and benefits of their staff (secondary Class 1 contributions) and must also collect their Class 1 National Insurance contributions and income tax through PAYE.
The company will pay Class 1 National Insurance contributions of 13.8% on earnings above the secondary threshold, which is set at £169 per week, £732 per month or £8,722 per year for the tax year of 2020/21.
Employer National Insurance contributions can be payable on benefits as well. Whether or not you have to pay them will depend on the benefits your employees received. You’ll have to pay Class 1A National Insurance contributions on any taxable benefits the company provides to employees, such as for company cars and medical insurance.
Employer National Insurance doesn’t apply to expenses if they have been reimbursed. These include expenses incurred by your staff, like work-related travel and subscriptions.
Tax Breaks as an Employer
While there are more tax considerations to take into account when you start employing people, you also get a few tax breaks designed to help you cut down costs.
For example, if you employ staff, you have the possibility of reducing the amount of employer National Insurance contributions payable up to the allowance limit of £4,000 per year. This is available for businesses with National Insurance contributions below £100,000.
As an employee of your company, contributions to your pension can be offset against corporation tax; you don’t have to pay the National Insurance figure of 13.8% on these pension contributions, so you’ll be saving money.
It’s worth noting that you can deduct the full value of items that fall under the Annual Investment Allowance umbrella, such as plant machinery, from your profits before you pay tax. The Annual Investment Allowance limit amount has increased temporarily from £200,000 to £1 million, although this will likely change after 31 December 2020.
If your company invests in research and development, you may be eligible to get a reduced corporation tax bill. After all, the government has implemented a scheme for SMEs with a tax relief on allowable research and development costs of 230%.
FreeAgent Can Help You
It can be a challenge to stay on top of so many different things. UK tax law is a complex matter and you already have plenty to do without having to add taxes to your list, so let us take care of it for you. We offer FreeAgent accounting software to all our clients, a tool that you’re able to access 24/7, no matter where you are in the world – or which device you’re using.
Your sensitive information is secure, as FreeAgent uses top-of-the-range encryption, and is able to get data in real time, helping you to make informed business decisions quickly.
What’s more, with FreeAgent, you don’t have to stress about missing deadlines or important documents, as everything is organised and easy to access. Handling your taxes has never been easier!
Whether you’re a sole trader or operate through a limited company, it’s important to figure out all the taxes you must pay and the relief you can get, including when you become an employer. At Gorilla Accounting, we can help, so don’t hesitate to contact us today on 0330 024 0406 to learn more about what we can do for you. We’re more than happy to answer your questions.