Can a Sole Trader Have Employees? A Comprehensive Guide

Operating as a sole trader can be an appealing option for many entrepreneurs, offering simplicity and autonomy in running a business. However, as your business grows, you may find yourself needing extra help to manage the workload. This leads to a common question among sole traders: Can I have employees?

In this article, we’ll explore the ins and outs of hiring employees as a sole trader, including legal considerations, tax implications, and practical tips.

What is a Sole Trader?

A sole trader, also known as a sole proprietor, is an individual who runs and owns a business independently. Unlike a company or partnership, there is no legal distinction between the owner and the business entity itself. This means that the owner is personally liable for all aspects of the business, including its debts and legal obligations.

Can a Sole Trader Have Employees?

A sole trader can indeed hire employees or contractors to assist with various tasks and responsibilities within their business. 

Employees typically work for a business on a regular basis and are subject to the employer’s control over their work. They receive benefits such as paid leave, insurance, and retirement plans.

However, contractors are self-employed individuals who work independently and are hired for specific projects or tasks and are typically paid on a project basis. Self-employed contractors are not entitled to employee benefits and are responsible for their own taxes and insurance.

Advantages and Disadvantages of Employing Staff as a Sole Trader 

Scaling up your sole trader business by hiring employees can be an exciting step. It allows you to delegate tasks, increase productivity, and ultimately, grow your business. However, there are both advantages and disadvantages to consider before taking the plunge.

Advantages: 

• Increased Capacity: With extra hands, you can take on more work, grow your business, and free yourself up to focus on strategic tasks.
• Expertise: You can hire people with specific skills and qualifications that you lack, allowing you to offer new services or improve the quality of your existing ones.
• Improved Efficiency: Employees can help streamline processes and workflows, leading to increased productivity and cost savings.
• Customer Service: With more staff, you can provide better customer service by offering faster response times and more personalised attention.
• Employee Loyalty: Employees who feel valued and invested in can become a strong asset to your business, bringing fresh ideas and a commitment to your success.

Disadvantages

• Financial Burden: Salaries, payroll taxes, and benefits can add significant costs to your business
• Increased Complexity: You’ll become responsible for HR tasks like recruitment, onboarding, training, and performance management. 
• Legal and Regulatory Requirements: There are many legal requirements around employment contracts, minimum wage, and health and safety that you’ll need to comply with.
• Less Flexibility: Unlike freelancers or contractors, you can’t easily scale your workforce up or down based on workload. You’ll have a financial commitment to your employees even during slow periods.

Legal and Tax Responsibilities for Hiring Staff as a Sole Trader 

In addition to weighing up the pros and cons of hiring employees, you also need to consider your legal and tax responsibilities as a sole trader employer. These include:

• Registering as an employer with HMRC: A legal requirement when hiring staff.
• Employment Contracts: You must provide written employment contracts to your staff, outlining the terms and conditions of their employment, such as pay, hours of work, and holiday entitlement.
• National Minimum Wage: As an employer, you are required to pay your employees at least the national minimum wage, which varies depending on their age and whether they are an apprentice.
• Health and Safety: You have a duty to ensure the health, safety, and welfare of your employees while they are at work. This includes providing a safe working environment and carrying out risk assessments.
• Pay As You Earn (PAYE) scheme: You’ll need to set up a PAYE scheme when hiring employees. This involves deducting income tax and National Insurance contributions from your employees’ wages and paying these amounts to HMRC on their behalf.
• Employment Rights: Your employees have certain rights and protections under employment law, including the right to receive a written statement of employment particulars, protection against unfair dismissal, statutory sick pay, pension contributions, and maternity or paternity pay.

How to Register as a Sole Trader Employer

You can sign up as an employer on the HMRC website. You will need to follow the online application process and provide:

• Your name, or the name of your sole trader business
• Your unique taxpayer reference and National Insurance number
• Your business address, phone number, and nature of the company
• Details of any expenses or benefits you wish to pay alongside salaries, e.g., whether you’re offering an occupational pension scheme

Once the application is submitted, HMRC will get back to you with your PAYE and Accounts Office reference codes.

It can take up to 30 working days to get your employer PAYE reference number, so it’s essential to register as an employer 30 days before the first payday. However, it is important to note that you cannot register more than 2 months before you start paying people.

How to Set Up PAYE as a Sole Trader Employer

Here’s how to set up PAYE as a sole trader:

1. Obtain Necessary Information

Collect necessary personal details from your employees, such as their name, address, date of birth, National Insurance number, and their P45 from the previous employer. If they do not have a P45, they will need to complete a starter checklist.

2. Choose Payroll Software

You’ll need payroll software to run your payroll. This software can calculate how much tax and National Insurance to deduct from your employees’ pay based on their earnings and tax codes.

3. Set Up Your Payroll

Input your employer details into the payroll software, including your PAYE reference and Accounts Office Reference. Add employee details into the software. Ensure that you enter their tax codes and starter information correctly, which you can obtain from their P45 or starter checklist.

How to Manage PAYE as a Sole Trader Employer

Managing PAYE effectively involves a systematic approach to ensure accurate payroll processing, compliance with tax laws, and timely communication with both HMRC and your employees. Here’s a breakdown of the key tasks involved:

1. Regularly Process Payroll

Process payroll at regular intervals (e.g., weekly, bi-weekly, monthly), depending on the employment contracts. Ensure each payroll run is accurately calculated, reflecting the correct hours worked, overtime, bonuses, and deductions.

2. Submit Real Time Information (RTI)

Each time you run payroll, you must submit an FPS (Full Payment Submission) to HMRC. This needs to be done on or before the day your employees are paid. This submission reports salaries and deductions for each employee to HMRC.

3. Handle Payments to HMRC

You are required to pay HMRC the tax and National Insurance contributions that you have deducted from your employees’ salaries. These payments are usually due by the 22nd of the month following the tax period (if paying electronically) or by the 19th if paying by cheque.

4. Issue Payslips

Provide your employees with detailed payslips each payday. Payslips must include gross pay, net pay, and details of deductions such as tax, National Insurance, pensions, and any other deductions. Payslips can be electronic or paper-based.

5. Year-End Processing

At the end of the tax year (April 5th), complete the year-end process using your payroll software. This includes sending your final FPS or an Employer Payment Summary (EPS) if no employees were paid in the last period of the tax year. This signals to HMRC that you have completed your submissions for the year.

6. Provide P60 Forms

You must provide a P60 to each employee who is on your payroll at the end of the tax year. The P60 summarises the total pay and deductions for the year and must be provided by May 31st. This document is important for your employees’ records, especially for future benefit claims or tax returns.

Can a Sole Trader Employ Staff?

Sole traders can indeed employ staff, an option that may be crucial for handling business growth and increasing operational capacity. While this step offers numerous benefits, such as enhanced productivity and the ability to expand services, it also introduces added responsibilities and complexities, particularly in areas of payroll management, legal compliance, and financial overheads.

Armed with the right information and resources, sole traders can successfully navigate the transition from a one-person operation to an employer, positioning their business for greater success and sustainability.

However, if managing PAYE becomes too complex or time-consuming, consider outsourcing payroll duties to a professional accountant like Mazuma.