Can a Sole Trader Have Employees?

Wondering can a sole trader have employees? The quick answer is yes. But it is not practised on common grounds. Being a sole trader, it is not necessary to work all alone. Of course, you can hire employees to expand your business. By employing people, you became an employer and there are legal obligations you need to comply with. Read on to learn:

• Is it essential to form a limited company to hire people?
• How to set up as an employer?
• UK employment law for sole traders

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Is it Essential to Form a Limited Company to Hire People?

No, you can hire people being a sole trader. It is not mandatory to form a limited company just for this reason. Though sole traders carry out their business on their own, it doesn’t imply that they can’t employ other people. The term sole trader doesn’t mean working individually, rather it refers to running a business under your own name. So, a sole trader can be an employer.

But how to set up as an employer being a sole trader? Let’s find out!

How to Register as an Employer Being Sole Trader?

Alike a limited company, a sole trader also need to register himself as an employer with HMRC. First, the sole trader need to do the PAYE (Pay As You Earn) registration before paying the first salary to the employees, but should not register late more than two months before the first payment.

By logging into the Government Gate Online Account, a sole trader can register for PAYE through this online form. Here is the information that needs to be provided while registering:

• Sole trader and Trading name (if applicable)
• Your business nature
• National Insurance number (NIN)
• Unique taxpayer reference (UTR)
• Official business phone number & address
• If the sole trader is working as Troncmaster
• If Occupational Pension Scheme will be used
• Staff expected to be hired in the current tax year
• Wages that have already been paid to employees
• Expenses and benefits that are going to be paid to employees

Once you (sole trader) registered as an employer, you will be issued PAYE and Accounts Office reference numbers by HMRC, around five working days. These reference numbers are needed to enrol for PAYE online. Let’s see the use of PAYE online.

PAYE Online

PAYE Online provided by HMRC is used for:

• the outstanding amount to be paid to HMRC
• sending payroll reports to HMRC
• appealing any penalty
• getting notices and tax codes about one’s employees
• receiving alerts from HMRC in relation to late payments etc

The sole trader (as an employer) needs to use PAYE online login details in payroll for submitting reports to HMRC. However, PAYE online service itself cannot be applied to send payroll reports, other than benefits and expenses returns by submitting a P11D form.

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How to Process Salary Payments without PAYE reference?

For the purpose of processing salary payments before getting an Employer PAYE reference number, you are required to:

• Operate payroll
• Store and send due Full Payment Submission (FPS) to HMRC

UK Employment Law for Sole Traders

As a sole trader, if you have decided to hire staff, you should understand and follow UK employment laws. These include:

• Paying at least the national minimum wage
• Statutory pay for maternity, paternity and adaptation leave
• Protecting staff from discrimination
• Providing minimum rest breaks and paid holiday

While hiring employees for your sole tradership, you need to understand your responsibilities as an employer and need to implement them in your business.

Quick Sum Up

After giving this blog a read, you have now got the answer ‘can a sole trader have employees’. Sole traders can have employees the same way as a limited company. Similarly, they need to register themselves as employers with HMRC. Moreover, they also need to run payroll and enrol for PAYE service to pay employees. And, they need to comply with employment laws and regulations.

Disclaimer: This blog contains general information on the topic.

What a sole trader must do before hiring

1. Register as an employer with HMRC before the first payday, and set up PAYE and payroll software.
2. Check right to work and keep copies of the documents.
3. Give a written statement of terms and pay at least the National Minimum or Living Wage, with the current rates on GOV.UK.
4. Take out employers’ liability insurance, which is legally required for most employers.
5. Enrol eligible staff in a workplace pension under auto-enrolment.
6. Report pay to HMRC on or before each pay day and pay PAYE and National Insurance on time.

Employer National Insurance is 15% on pay above £5,000 per employee, and eligible employers can claim the Employment Allowance of up to £10,500. Wages are a deductible business expense. See our employer payment summary article and payroll service.

A worked example of employing someone

A sole trader hires one employee on £25,000 a year. Employer National Insurance is 15% above £5,000, which is £3,000. Employer pension contributions of 3% on qualifying earnings above £6,240 come to about £563. If the sole trader is eligible for the Employment Allowance of up to £10,500, the £3,000 of employer National Insurance is covered by the allowance, so the extra cost above the wage is mainly the pension, around £563. Without the allowance, the total cost would be about £28,563. Add holiday pay, sick pay, insurance and software costs when you budget.

Employee or subcontractor?

Whether someone is an employee or self-employed depends on the real working relationship, including control, substitution and who provides equipment, not on what the contract says. Getting it wrong can lead to PAYE and National Insurance bills. Use HMRC’s employment status tool and take advice if you are unsure.

Basic employment rights to plan for

• A written statement of terms from the first day.
• Statutory holiday of 5.6 weeks a year for full-time staff.
• Statutory sick pay where qualifying conditions are met.
• Payslips for every pay day.
• Protection against unfair treatment, with rights growing as service builds.

Running payroll as a sole trader

Payroll means working out each employee’s pay, tax, National Insurance and pension, reporting it to HMRC on or before each pay day and paying HMRC by the 22nd of the following month if paying electronically. Payroll software makes this routine, and many small employers use an accountant to run it. Remember to give payslips, keep records for at least three years and send year-end reports. If you do not want to run payroll yourself, our payroll service handles it.

Is hiring right for you now?

Before you hire, check that you have steady work, enough cash for wages and employer costs, and time to manage someone. If not, consider a subcontractor, a part-time employee or outsourcing admin. Ask your accountant to model the cost so there are no surprises.

Frequently asked questions

Can a sole trader employ staff?

Yes. A sole trader can hire employees but must register as an employer and operate PAYE.

Do I need insurance?

Employers’ liability insurance is required for most employers.

Can I claim the Employment Allowance?

Yes, if you are eligible and pay employer National Insurance.