Get the groundwork right before payday

Taking on your first employee is a genuine milestone, and payroll is one of those jobs that feels daunting until you've done it once. A little preparation means you'll avoid penalties and awkward conversations later. Before you think about numbers, tick off a few essentials.

• Check they can legally work in the UK. Ask for a passport, birth certificate or share code, check it in their presence, and keep a dated copy. Getting this wrong can lead to a civil penalty.
• Take out employer's liability insurance. This is a legal requirement as soon as you employ anyone, with a minimum of £5 million of cover. Fines can run to £2,500 for each day you're uninsured.
• Issue a written statement of particulars on or before their first day. It sets out pay, hours, holiday, notice and where they'll work.
• Think about a pension. Even with one employee, you'll almost certainly have automatic enrolment duties. More on that below.

Register as an employer with HMRC

You need to register for PAYE before your first payday, and you can't do it more than two months in advance. Registration is done online and usually takes around 15 working days, so don't leave it until the day before someone starts.

There's a narrow exemption: if your only employee earns below the Lower Earnings Limit (currently £125 a week) and doesn't have another job, receive a pension or get expenses or benefits, you may not need to register. In practice, most businesses register anyway, because circumstances change quickly.

Once registered you'll receive two references that you'll use constantly:

• Your PAYE reference — identifies you as an employer in every submission to HMRC.
• Your Accounts Office reference — the reference you quote when paying over tax and National Insurance.

Keep both somewhere safe, and share them with your accountant if you have one.

Decide how you'll actually run payroll

You have three realistic options, and none of them is wrong.

• Payroll software. Most packages are recognised by HMRC for Real Time Information (RTI) reporting. Expect to pay anywhere from a few pounds to £15 or so a month for a small payroll, depending on features.
• HMRC's free tools. Suitable only for very small employers with straightforward payrolls, and limited in what they handle.
• An accountant or payroll bureau. Often the best value if you'd rather not think about it at all. Typical costs for a single employee run from around £10 to £30 a month.

Whichever you choose, do a dummy run before the first real payday. Confirm the software calculates the right deductions for your employee's tax code and that your bank details are set up for paying HMRC.

Work out what to pay and what to deduct

Start by collecting your new employee's P45 from their previous job, or ask them to complete a starter checklist if they don't have one. This tells you their tax code — usually 1257L for someone with a single job and the standard personal allowance.

From their gross pay you'll deduct:

• Income tax based on their tax code and the PAYE tax tables.
• Employee National Insurance. For 2025/26 this is 8% on earnings between £12,570 and £50,270 a year, then 2% above that.
• Pension contributions once they're enrolled.

You'll also pay employer National Insurance at 15% on earnings above the secondary threshold of £5,000 a year, on top of gross pay. The Employment Allowance of up to £10,500 often wipes this out for a one-person payroll, but you still need to claim it through your software.

Don't forget minimum wage rules. The National Living Wage for those aged 21 and over is £12.21 an hour, with lower rates for younger workers and apprentices. Rates change every April, so diarise a check.

Automatic enrolment applies if your employee is aged 22 to state pension age and earns over £10,000 a year. Total contributions must be at least 8% of qualifying earnings (between £6,240 and £50,270), with you paying at least 3%. Duties begin from the first payday, so assess your employee straight away.

Payday duties you can't skip

Every pay period you'll need to:

• Send a Full Payment Submission (FPS) to HMRC on or before the day you pay your employee. Late or missing submissions attract penalties.
• Give a payslip on or before payday. It must show gross pay, every deduction and the net figure, and for variable hours you must also state the hours worked.
• Pay HMRC the tax and NI you've deducted by the 22nd of the following month if paying electronically, or the 19th by post. If your monthly bill is under £1,500, you can usually pay quarterly.
• Declare pension compliance to the Pensions Regulator within five months of your duties start date, and keep re-enrolling and assessing staff as pay changes.

Keep payroll records for at least three years after the end of the tax year they relate to.

Staying on top of it all

Most first-time employer problems come from three things: missing a filing deadline, assuming a tax code is correct without checking, and forgetting that the true cost of an employee is roughly 15% above their salary once employer NI and pension contributions are counted. Budget for that before you agree a wage.

Put your payroll dates in your calendar, review everything each April when rates and thresholds shift, and don't be afraid to hand the whole thing to a professional if it's eating your evenings. You started a business to do the work you love, not to become a payroll clerk.