Employment & Payroll

Employers usually have to pay employees through PAYE if they earn £123 or more a week (£533 a month or £6,396 a year). There is no requirement to pay self-employed workers through PAYE.

HMRC’s guidance states that:

As a general rule, someone is:

• employed if they work for you and do not have any of the risks associated with running a business; and
• self-employed if they run their own business and are responsible for its success or failure.

There are specific rules for temporary or agency workers. Employers need to operate PAYE on temporary workers that they pay directly, as long as they’re classed as an employee. There is not usually a requirement to operate PAYE if a worker is paid by an agency, unless the agency is based abroad and does not have either a trading address or a representative in the UK.

Employers that take on a new employee need to work out which tax code and starter declaration to use in their payroll software. Incorrect tax codes can lead to the new employee paying more tax than is due.

The necessary information can be collected from the employee’s P45 or by asking the new employee to complete HMRC's starter checklist (if they do not have a recent P45 – this checklist replaced the P46).

The letters in an employee’s tax code signify their entitlement (or not) to the annual tax free personal allowance. The tax codes are updated annually and help employer’s work out how much tax to deduct from an employee’s pay packet. 

The basic personal allowance for the tax year starting 6 April 2023 is £12,570 and the tax code for an employee entitled to the standard tax-free Personal Allowance 1257L. This is the most common tax code and is used for most people with one job and no untaxed income, unpaid tax or taxable benefits (for example a company car).

Emergency tax codes can be used if HMRC does not receive a taxpayer’s income details in time after a change in circumstances such as:

• a new job
• working for an employer after being self-employed
• getting company benefits or the State Pension

Employees on an emergency tax code will see one of the following codes on their payslip:

• 1257L W1
• 1257L M1
• 1257L X

These codes mean that an employee’s tax calculation is based only on what they are paid in the current pay period. The emergency tax codes are temporary and will usually be updated once the necessary details about previous income or pension payments are sent to HMRC.

There are certain tax rules that it is important to be aware of where you pay for the public transport costs of your employees. The provision of public transport costs include:

• season tickets provided for employees;
• season ticket costs reimbursed to employees;
• loans made to employees to buy season tickets; and
• contributions to subsidised or free public bus transport.

If you are contributing to subsidised or free public bus transport there are no reporting requirements to HMRC, and you do not have to pay any tax or National Insurance on these costs. This is because there is a special exemption in place for subsidies to public bus services. For example, HMRC have confirmed that if you help finance a bus route that gives your employees free or reduced-rate transport between their homes and work or between workplaces, then no taxable benefit arises.

However, if the public transport costs are not exempt then the costs will need to be reported to HMRC with tax and National Insurance implications. This includes where season tickets are provided to your employees, where the cost of a season ticket is reimbursed or where a loan is made to your employee to purchase a season ticket.

A new law that stops employers from withholding tips from people working in the hospitality, leisure and services sectors has come into force. The Employment (Allocation of Tips) Act 2023 received Royal Assent on 2 May 2023. 

The Bill makes it unlawful for businesses to hold back service charges from their employees, ensuring staff receive the tips they have earned. The measures are expected to come into force in about a year, following a consultation and secondary legislation.

This means that more than 2 million workers will have their tips protected. HMRC has estimated that this new law will mean an estimated £200 million a year will go back into the pockets of hard-working staff by retaining tips that would otherwise have been deducted.

A new statutory Code of Practice will also be developed in order to provide businesses with advice on how tips should be distributed among staff. This Code is being developed and will be subject to formal consultation later this year.

Workers will also be given a new right to request more information relating to their employer’s tipping record, which will help them to bring forward a credible claim to an employment tribunal.

The Business and Trade Minister said:

'As people face rising living costs, it is not right for employers to withhold tips from their hard-working employees. Whether you are pulling pints or delivering a pizza, this new law will ensure that staff receive a fair day’s pay for a fair day’s work – and it means customers can be confident their money is going to those who deserve it.'

Where an employee with a company car is provided with fuel for their own private use by their employers, the default position is that the employee is required to pay the car fuel benefit charge. The charge is determined by reference to the CO2 rating of the car, applied to a fixed amount, currently £27,800. For example, a CO2 rating of 150g/km would create a taxable benefit of £9,730.

The car fuel benefit charge is not applicable when the employee pays for all their private fuel, this includes commuting to and from work. Employees should keep a log of private mileage, which they can then apply to the published advisory fuel rates to repay the cost of fuel used for private travel. In this case, HMRC will accept that there is no car fuel benefit charge, and the employee will save the Income Tax charge on the private car fuel. It will usually be much cheaper to repay your employer for private fuel rather than pay the Income Tax charge, especially if private mileage is relatively low.

The advisory fuel rates are intended to reflect actual average fuel costs and are updated quarterly. However, the use of the advisory fuel rates is not binding if the employer can demonstrate that employees cover the full cost of private fuel by repaying at a lower rate per mile. There is also a lower advisory rate if the company car is fully electric.

When an employer incurs costs for the provision of mobile phones to employees it is important to understand the correct tax treatment of these expenses. This includes costs for phones provided to employees and reimbursement of employee’s own phone costs.

As a general rule, the provision of one mobile phone or SIM card to a director or employee for private use is exempt from reporting requirements, tax and National Insurance. The exemption covers the phone itself, any line rental and the cost of private calls paid for by the employer on that phone. The phone contract must be between the employer and the supplier.

If the telephone expenses are not exempt, then they must be reported to HMRC, and employers may have to deduct and pay tax and National Insurance. Employee’s mobile phone expenses do not have to be reported if they are part of a salary sacrifice arrangement.

For example, if an employee arranges the phone but the employer pays the supplier then the employer must:

• report the cost on form P11D; and
• pay Class 1 National Insurance through payroll.

HMRC also make it clear that there remain devices that have telephone functionality which do not qualify as mobile phones. The tax exemption applies only to devices primarily designed for voice communication. For example, the rules do not apply to tablets, PDAs and other similar devices.

An employee can obtain a benefit when provided with an employment-related cheap or interest-free loan. The benefit is the difference between the interest the employee pays, if any, and the commercial rate the employee would have to pay on a loan obtained elsewhere. These types of loans are referred to as beneficial loans.

There are a number of scenarios where beneficial loans are exempt and employers might not have to report anything to HMRC or pay tax and National Insurance. The most common exemption relates to small loans with a combined outstanding value to an employee of less than £10,000 throughout the whole tax year.

The list also includes loans provided:

• in the normal course of a domestic or family relationship as an individual (not as a company you control, even if you are the sole owner and employee);
• to an employee for a fixed and invariable period, and at a fixed and invariable rate that was equal to or higher than HMRC’s official interest rate when the loan was taken out;
• under identical terms and conditions to the general public as well (this mostly applies to commercial lenders);
• that are ‘qualifying loans’, meaning all of the interest qualifies for tax relief; and
• using a director’s loan account as long as it’s not overdrawn at any time during the tax year.

The P9X form is used to notify employers of the tax codes to use for employees. The latest version of the form has been published and shows the tax codes to use from 6 April 2023. The form states that the basic personal allowance for the tax year starting 6 April 2023 will, as expected, be £12,570 (£12,570 in 2022-23) and this means that the tax code for emergency use will remain at 1257L.

The basic rate limit will be £37,700 (£37,700 in 2022-23) except for those defined as Scottish taxpayers who have a lower basic rate limit as well as an intermediate rate. The new form P9X is available online on GOV.UK to download or print.

The P9X (2023) form also includes information to help employers in the new tax year. The document also reminds employers that have new employees starting work between 6 April and 24 May 2023 and who provide you with a P45 to follow the instructions at www.gov.uk/new-employee.

There are a multitude of rules and regulations that you must be aware of when you employ someone from abroad who is coming to work in the UK.

HMRC’s guidance (entitled New employee coming to work from abroad) sets out some important issues to be aware of when taking on a new employee from abroad.

This includes the following:

• Check an employee’s right to work in the UK
• Paying tax and National Insurance contributions
• National Insurance contributions 
• Modified PAYE arrangements
• Payments
• Work done in and outside the UK
• Short term business visitors

UK employers must operate PAYE and NICs for employees from abroad regardless of whether they are working on a temporary or permanent basis. This also applies to seconded employees who are being paid by an overseas company. The UK employer is responsible for reporting earnings and PAYE deductions in the same way as for a UK employee.

New employees from abroad will not have a P45 so you will need to obtain all the pertinent information to set them up and report to HMRC on a Full Payment Submission (FPS). 

This includes their full name, gender, date of birth, full address and National Insurance number (if the employee knows it). The employer will also need a completed starter declaration and should enquire if the new employee has an existing student loan. 

There is a particular section of internal HMRC’s manuals that deals specifically with how to view the rules for measuring profits of specific trades. The list includes over 50 different trades as diverse as actors, athletes, barristers, bookmakers, motor dealers, care providers, doctors and dentists, financial traders, marine pilots, missionaries, pawnbrokers and subcontractors.

The section on actors and other entertainers states these people may be engaged under either a contract for services, the profits of which are taxable as professional profits, or a contract of employment, which is taxable as employment income.

Existing case law sometimes supports the view that individual contracts are not always contracts of employment.

HMRC's guidance states the following:

Accordingly, performer’s/artist’s earnings will be liable as the profits of a profession in many cases. The sort of engagement where an employment and PAYE may be appropriate, is more likely to be in circumstances where a performer/artist is engaged for a regular salary to perform in a series of different productions over a period of time, in such roles as may be from time to time stipulated by the engager, with a minimum period of notice before termination of the contract. This would apply for example to permanent members of some orchestras and permanent members of an opera, ballet or theatre company. An employment and PAYE would apply in these cases regardless of the receipt by the performer/artist of other income correctly chargeable as profits of a profession.