Employing Staff as a Sole Trader
When business goes well, there will come a time when an additional pair of hands is necessary. Growing your sole trader business often means bringing on additional help, and if you’re wondering, “Can I employ people as a sole trader?” The answer is yes you can, and there is a straightforward way to go about doing so.
Many sole traders mistakenly believe that they need to form a limited company before employing any staff. This is a common misconception. However, there are some specific processes and rules to follow before hiring your first member of staff as a sole trader.
Let’s explore everything that you need to know before you get started with hiring your first employee as a sole trader.
Can a Sole Trader Employ Staff?
Despite the word ‘sole trader’ inferring that somebody works alone, being a sole trader simply means that they own their entire business and are personally responsible for its management. Being a sole trader means that the business isn’t legally separate from you in the same way that a limited company is. It has no bearing on whether you can or cannot imply staff.
How to Employ Staff as a Sole Trader
- Register as an Employer with HMRC
Before you make your first official hire, you must register with HMRC as an employer. This process involves receiving an Employer PAYE Reference Number (ERN), which can take up to five working days. You’ll need this to complete your end-of-year PAYE tax return form.
Bear in mind that you cannot register more than two months before you begin paying your new hire, and you must register before the employee’s first payday.
- Set Up Your Payroll System
You’ll need to implement a thorough payroll system to calculate wages and deductions each month, as well as update and maintain employment records, provide payslips to employees, calculate tax deductions from salaries, and submit regular reports to HMRC.
Consider whether you’ll manage payroll yourself using HMRC’s suite of PAYE tools and payroll and accounting software or whether to outsource your payroll to a professional accountant, who can oversee this whole obligation on your behalf.
- Understand Your Tax Obligations
As an employer, you’ll need to deduct and pay the following taxes:
- Income Tax (from any employee earnings above the personal allowance)
- National Insurance contributions (NICs) for both employee and employer
- Full Payment Submissions (FPS) every payday
- The collected tax and NICs to HMRC by the 22nd of the following month
- Set Up a Workplace Pension
In accordance with auto-enrolment laws, sole traders who employ staff must provide a workplace pension for eligible employees (i.e. if they are over 22 and earn at least £10,000 a year).
The minimum total contribution is 8% of qualifying earnings. Employers must contribute at least 3% and employees pay the remaining 5%. Employees are entitled to opt out but they must be enrolled automatically by law.
- Understand Employment Rights as a Sole Trader
Employees are entitled to various statutory rights, including:
- National Minimum/Living Wage
- Holiday pay
- Statutory Sick Pay (SSP)
- Protection against unfair dismissal
- Maternity or paternity pay
- Minimum notice periods for termination
- Safe working conditions
If you decide not to employ people full-time and instead engage another sole trader – or freelancer – to support you, these self-employed professionals won’t qualify for employment benefits. They will be responsible for their own taxes and financial affairs. However, you must ensure you are fully in the know about their true employment status. If HMRC were to initiate an investigation and find that workers’ status reflected full-time rather than self-employment, you would be eligible for missing PAYE tax.
- Obtain Employers’ Liability Insurance
This insurance is legally required once you become an employer, covering you if an employee becomes ill or injured due to their work.
Proper preparation and planning can save considerable stress and time, and avoid potential financial penalties down the line.
Should I Hire as a Sole Trader or a Limited Company?
While you can confidently employ staff as a sole trader, you may wish to consider forming a limited company as your business scales and grows. Limited companies can offer personal liability protection, which could prove invaluable when employing staff because you wouldn’t be personally liable for any debts or claims related to employment.
Get Professional, Personalised Accounting Support for Your Sole Trader Business
At Hamlyns, we recognise that taking on your first employee as a sole trader can be a huge step. To navigate this change with complete reassurance and peace of mind, we can provide guidance on all aspects related to employment, from registering your business with HMRC and setting up reliable payroll systems to managing day-to-day bookkeeping, VAT returns, MTD (Making Tax Digital) and navigating changing employment laws and tax obligations stemming from the recent budget.
Our professional accountants and tax advisers can help ensure you meet your legal obligations as an employer while you remain focused on growing your business. Contact us today to see how we can help you get started.
