Can You Employ People as a Sole Trader?

Being a sole trader doesn’t mean you have to do everything by yourself. Any type of business owner can employ someone else to help them as the business grows. In this article we answer some of the most frequently asked questions sole traders have about becoming an employer, and go over what steps to take next.

Do I have to form a limited company to employ people?

No, although it’s a very common question! You can employ people and remain a sole trader, so there’s no need to set up a limited company if you don’t want to. While sole traders operate and take responsibility for the business on their own, that doesn’t mean they have to work alone. The term sole trader just means you are trading as yourself, under your own name (our guides explain operating as a sole trader in more detail!).

You can choose to employ people on a permanent, part-time, or freelance basis; whatever suits you best.

Can I still claim an employee’s wages as a business expense if I’m a sole trader?

Yes, you can claim the costs associated with employing someone else even if you’re a sole trader – just include it as a business expense in your Self Assessment or MTD Income Tax return. These costs might include their salary, as well as National Insurance and pension contributions you need to make as their employer.

Can a sole trader hire another self-employed person?

Normally, yes! As long as this only happens infrequently on an ad hoc basis, then you can hire other people as you need them and they can invoice you for their time just like any other business might (which will be an allowable expense for your business).

It gets a bit more complicated if this were to be a daily occurrence and works more like an employer/employee relationship, so take advice if you’re not too sure.

How does a sole trader take on staff?

Taking on a new employee for the first time can seem like a daunting experience, but the process is pretty much the same whatever your business structure might be.

Decide how much to pay them

Depending on their age, you’ll normally need to pay your new employee at least the National Minimum Wage. Working out how much to pay someone might be more complicated for technical or senior roles, so take a look at the industry standard and your area.

Can you afford to employ them?

Taking on a member of staff means you’re committing to pay:

• Their wages
• Employer contributions for National Insurance
• Employer’s pension payments
• Employer’s liability insurance

And that might just be the starting point! There could also be various training and insurance costs to consider. It’s worth taking some time to work out the cost of employing someone, and then consider whether the value they bring to the business is greater. And of course, factor this into your cash flow planning.

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Advertise the role

You might get a local recruiter on the case, or simply create an ad on one of the many job sites available. You’ll need to make sure your listing includes enough information to attract the best candidates, and that the way you recruit is fair and inclusive. There are laws around discrimination and data protection throughout the hiring process.

Check they have the legal right to work in the UK

You’ll need to check your potential new employee has the right to work in the UK. The process for this depends on the documents they have available.

Get insurance

Every employer must have employers’ liability insurance from an authorised insurer, with a policy which covers you for at least £5 million. Having the correct insurance is a big deal, and you can be fined £2,500 for every day you are not properly insured. Ouch!

Prepare a contract or written statement of employment

You’ll need to make a formal job offer in writing, and include a full job description along with the terms and conditions of their employment. Anyone you’re taking on for longer than 1 month must have a written statement of employment.

Register as an employer

You’ll need to register as an employer with HMRC before the first payday, which you can do up to 4 weeks in advance. HMRC will send out your Employer Reference number (also known as a PAYE reference), which you’ll use to make submissions to HMRC telling them about your employees’ wages.

This is so you can deduct income tax and National Insurance from the wages of eligible employees, and pay it on to HMRC on their behalf. Our PAYE guide explains this process is more detail!

Setting up payroll and a workplace pension scheme

As a brand-new employer it will be your responsibility to set up payroll and make arrangements for employees to be paid correctly and on time, as well as providing an appropriate workplace pension scheme if your employees are eligible for auto-enrolment. You can do this by setting up payroll yourself, or you can outsource it to someone else, such as your accountant.

It’s best to do this as soon as you can, so nothing is forgotten or neglected while you prepare to train your new employee!

Learn more about our accounting services for sole traders. Call 020 3355 4047 to chat to the team, and get an instant online quote.