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Tax, NIC and Pensions and Your Employees

By: Dave Howell - Updated: 1 Aug 2013 | comments*Discuss
Pensions Taxes Tax Preparation Tax Forms

When your business takes on an employee you become responsible for accurately managing their pension, National Insurance contributions, the payment of their taxes and any other deductions such as payments to an additional private or employee pensions scheme your business may have running.

Becoming an employer for their first time can seem like a daunting prospect, but in reality there is plenty of help and advice to enable you to set-up your employee pension, National Insurance contributions and tax payments from HMRC (HM Revenue & Customs). You can read detailed guidance on HRMC's website that includes details of the tax forms you have to complete.

If you have specific questions about becoming an employer you can phone the New Employer Helpline on: 0845 607 0143. There is also a new employer starter pack you can obtain from the HMRC by calling the new employer helpline.

Before You Take on an Employee

As the owner of your franchise business it is your responsibility to check the employment status of everyone that works for you. To do your tax preparations, pension checks etc. your staff must be able to legally work for you. It’s also a good idea to check the employment status of people who might actually have freelance or consultant status as their National Insurance, pensions and taxes are handled by the self-assessment system.

Tax and your Employees

The first thing you have to do is register as an employer. You can find detailed instructions about how to do this on the HMRC website: www.hmrc.gov.uk. Income tax for your staff is handled by the PAYE (Pay As You Earn) system. The most important document for income tax purposes is your employee’s P45. This document shows:

  • The persons National Insurance number
  • The tax code for income tax deductions
  • Total pay that the person has received to date

Some employees may not have a P45. In this case you need to complete form P46. They may also not have a National Insurance number. If they don’t you must complete form CA6855 to locate their number. This form is on your employer starter pack CD ROM along with all the other tax forms you will need. There are a number of circumstances where you have to vary how you handle the income tax affairs of your employees and consequently how you make your tax preparation for the HMRC. You can see detailed information about the PAYE system on the HMRC website: www.hmrc.gov.uk.

National Insurance and Your Employees

Generally all employees have to pay Class 1 National Insurance contributions. This is a percentage of their gross pay that you as their employer deduct before you pay their salary. There are a number of other classes of National Insurance payments that you may have to pay. There is full details on the HMRC website: www.hmrc.gov.uk.

As the national insurance payments that your employees make go towards paying for any state benefits they may claim in the future, it is vitally important that your calculations are correct. If you are in any doubt about your National Insurance system, contact the HMRC for advice. And remember that all National Insurance deductions you make must be paid to HMRC by set dates. Miss these payment dates and you will have to pay a penalty.

Pension Contributions and Your Employees

As an employer part of the National Insurance deductions you make from your employee’s pay goes towards their state pension. In addition to this payment all employers now offer their employees the option of paying into an additional stakeholder pension to help them save additional money for their retirement.

The stakeholder pensions don’t cost employers anything, but the government is now making it a legal requirement to offers these pensions schemes to your employees in addition to the standard state pension. You can read more about your pensions responsibilities on The Pension Service website.

As an employer you can also offer your employees your own pensions scheme. These are called occupational pensions or sometimes company pension schemes. Before you choose a pensions scheme to offer to your employees it’s a good idea to speak to a pensions advisor as there are a number of factors you have to take into consideration. There is also an overview of how your can operate an employer’s pension scheme on the Business Link website.

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