Hiring your first employee in the UK means five legal jobs that all have to happen before their first payday: register as an employer with HMRC and set up PAYE, take out employer’s liability insurance, run a right to work check, give a written statement of terms, and put a workplace pension in place. Miss any one and you risk fines, backdated liabilities or an employment tribunal claim. The good news is that each step is well defined, and modern payroll software handles most of the mechanics for you.
This is the operational order to work through. Confirm the person is genuinely an employee (not a worker or contractor), register for PAYE (Pay As You Earn, the system for deducting tax and National Insurance from wages), pick payroll software, sort insurance and pensions, then handle right to work, the contract and onboarding. Below is a checklist with due dates, a comparison of your options, the mistakes people actually make, and links to the gov.uk pages for every statutory item. Rates change every April, so always confirm current figures on gov.uk before you run a payslip.
Employee, worker or contractor: get this right first
Employment status decides your legal duties, and it is the single most expensive thing to get wrong. UK law recognises three categories, and the label on the contract does not settle it. What matters is the reality of how the person works.
- Employee: works under your control, on your equipment, to set hours, with an obligation to accept work you offer. Gets the full set of rights: minimum wage, holiday, sick pay, pension, notice, and protection from unfair dismissal after two years.
- Worker: a middle category. Casual or zero-hours staff who turn up personally but with less mutual obligation. Entitled to minimum wage, holiday and pension, but not the full employee protections.
- Self-employed contractor: runs their own business, invoices you, controls how the work is done, and can send a substitute. No PAYE, no holiday, no pension from you.
Calling someone a contractor to avoid PAYE and pension costs is the classic mistake. If HMRC or a tribunal later decides they were really an employee, you can be liable for backdated tax, National Insurance, holiday pay and pension contributions, plus penalties. This is the same misclassification risk that sits behind the IR35 off-payroll rules for personal service companies. If in doubt, run HMRC’s free Check Employment Status for Tax (CEST) tool and keep the result. For a first hire who works set hours on your premises, the honest answer is almost always employee.
The legal must-dos and when they are due
Here is the sequence with timing. Treat “before first payday” as your hard deadline for most items.
| Task | When it is due | Why it matters |
|---|---|---|
| Register as an employer with HMRC (PAYE) | Before the first payday; can take up to 15 working days to get your PAYE reference | You cannot legally pay wages and report to HMRC without it |
| Employer’s liability insurance | Before the employee starts | Legally required; fines of up to £2,500 per day without it |
| Right to work check | Before employment starts | A correct check is your defence against a civil penalty of up to £60,000 per illegal worker |
| Written statement of particulars | On or before day one | A legal right from the first day of employment |
| Set up payroll and RTI reporting | On or before the first payday | You must report pay and deductions to HMRC on or before each payday |
| Assess for workplace pension | From the employee’s first day (their “duties start date”) | Auto-enrolment duties apply the moment you employ someone |
| Claim Employment Allowance | Any time in the tax year, via payroll | Reduces your employer National Insurance bill |
Registering as an employer and setting up PAYE
You register through the gov.uk register as an employer service. You can usually register up to two months before you start paying staff, and you should register before the first payday. HMRC sends your employer PAYE reference and Accounts Office reference by post, which can take up to 15 working days, so do not leave it to the last week.
PAYE is how you deduct Income Tax and employee National Insurance from wages and pass them to HMRC. Even if your first employee earns below the tax threshold, you generally still need to register once you meet any of HMRC’s triggers, for example paying at or above the National Insurance lower earnings limit, or the employee having another job. If you are already a sole trader thinking about wider tax admin, our SME guide to Making Tax Digital in 2026 explains how the reporting picture is changing.
Choosing payroll software and running RTI
Every time you pay someone you must send a Real Time Information (RTI) submission to HMRC on or before the payday. This reports gross pay, tax, National Insurance and pension deductions. Doing this by hand is a false economy; payroll software calculates deductions, produces payslips and files the RTI return automatically.
Most small firms either add a payroll module to their accounting software or use dedicated payroll. Approximate prices below are a guide only and change often, so check the vendor’s current pricing.
| Option | Rough monthly cost | Handles RTI and pensions | Best for |
|---|---|---|---|
| HMRC Basic PAYE Tools (free) | £0 | RTI yes, payslips and pensions no | One or two employees, minimal budget, comfortable with admin |
| Payroll add-on to Xero or QuickBooks | From roughly £5 to £15 | Yes | Firms already using that accounting software |
| Standalone payroll (BrightPay, Moorepay) | From roughly £10 upward | Yes | Owners who want dedicated payroll features |
| Outsource to your accountant or a bureau | Roughly £5 to £15 per payslip | Yes, they do it | Owners who would rather never touch payroll |
If you are still building your back office, our roundup of the best AI accounting tools for UK small businesses covers software that bundles payroll with bookkeeping, and the wider operations stack every sub-£1m business should know about shows where payroll fits alongside rotas and job management.
Employer National Insurance and the Employment Allowance
On top of the employee’s own deductions, you as the employer pay employer’s National Insurance contributions on their earnings above a threshold. This is a real cost to budget for, separate from the wage itself.
Most small employers can offset a chunk of this through the Employment Allowance, which reduces your annual employer National Insurance bill. You claim it through your payroll software by ticking a box, and it applies as you run payroll across the year. There are eligibility conditions (for example, a single-director company with no other employees generally cannot claim), so read the gov.uk criteria before you rely on it. The exact allowance and thresholds change each April, so confirm the current figures.
Workplace pension auto-enrolment
The day you employ someone, auto-enrolment duties begin. You must assess whether your employee qualifies, and if they do, enrol them into a workplace pension and pay employer contributions. Even if nobody qualifies for automatic enrolment, you still have duties, including writing to staff and completing a declaration of compliance with The Pensions Regulator.
Employees aged between 22 and State Pension age earning above the annual trigger must be enrolled, with minimum contributions split between you and them. The employee can opt out, but you must never encourage them to. Start at The Pensions Regulator’s guidance for new employers, which walks you through your specific duties and deadlines.
Choosing a pension provider
Popular options for small firms include Nest (the government-backed scheme set up for auto-enrolment, which must accept any employer), Smart Pension and The People’s Pension. Most integrate with payroll software so contributions are calculated and submitted automatically. Set the scheme up early, because you need it in place from the employee’s first day, and you must complete your declaration of compliance within five months of your duties starting.
Employer’s liability insurance
This one is not optional. Once you employ staff, you are legally required to hold employer’s liability insurance of at least £5 million from an authorised insurer. It covers claims if an employee is injured or made ill through work. You can be fined up to £2,500 for every day you are uninsured, and you must display or make the certificate available to staff.
Approximate premiums for a very small firm often start in the low hundreds of pounds a year, but the figure depends heavily on your trade and headcount, so get quotes for your specific situation. Buy this before the employee’s first day, not after.
Right to work checks and the share code
You must confirm every new employee has the legal right to work in the UK before they start. Get this right and you have a “statutory excuse” that protects you from a civil penalty of up to £60,000 per illegal worker. Get it wrong or skip it and you carry the full liability.
For most people you now do an online check using a share code. The employee generates a code through the gov.uk service and gives it to you along with their date of birth; you enter both into the employer checking service and keep a copy of the result. For British and Irish citizens who cannot get a share code, you can use a certified Identity Service Provider or check original documents in person. Whatever the method, record what you did and the date, and keep it for the duration of employment plus two years.
The written statement of employment particulars
Every employee and worker has a legal right to a written statement of employment particulars on or before their first day. This is not the same as a full contract, though many firms combine them. The principal statement must include, as a minimum:
- Your business name and the employee’s name, job title and start date
- Pay and how often it is paid
- Hours and days of work, and whether they may vary
- Holiday entitlement
- Place of work
- Probation period, notice periods and any benefits
- Sick pay arrangements and any training entitlement
Draft this properly. A clear contract prevents most of the disputes that cost small employers time and money later.
Pay, holiday and probation
National Minimum and Living Wage
You must pay at least the statutory minimum for the employee’s age. The National Minimum Wage and National Living Wage rates rise every April, and the National Living Wage applies from age 21. Underpaying, even by accident through unpaid training time or uniform deductions, can trigger HMRC enforcement and public naming. Always check the current rate before you set a wage.
Holiday entitlement
Full-time employees are legally entitled to 5.6 weeks of paid holiday a year, which is 28 days for a five-day week. You can include bank holidays within that figure or give them on top; state clearly which in the contract. For part-time staff, multiply the days worked per week by 5.6 (someone working three days a week gets 16.8 days). For irregular hours, holiday accrues at 12.07% of hours worked.
Probation periods
A probation period, commonly three to six months, lets both sides confirm the fit. It does not reduce statutory rights, but it usually allows a shorter notice period and a simpler review process. Set expectations, meet regularly, and confirm the outcome in writing before the period ends.
The first 90 days: onboarding basics
A structured start turns an expensive hire into a productive one. Before day one, have their workspace, logins and equipment ready, and confirm the start time and dress code. On day one, complete any outstanding right to work step, hand over the written statement, and walk them through health and safety and how to report absence.
Set clear goals for the first month and book short weekly check-ins. Because a new person now has access to your systems and customer data, tighten your basics: unique logins, a password manager and multi-factor authentication. Our explainer on Cyber Essentials for UK small businesses covers the controls worth having in place before you widen access. Keep records of employee data in line with the ICO’s guidance for organisations, since payroll and personnel files count as personal data.
Mistakes people actually make
- Registering for PAYE too late. The reference can take up to 15 working days, so a last-minute registration means you cannot run the first payslip on time.
- Calling an employee a contractor. It feels cheaper until HMRC reclassifies them and bills you for backdated tax, holiday and pension.
- Forgetting employer’s liability insurance. The daily fine is severe, and buying cover the day after someone starts leaves a gap.
- Ignoring pension duties because “nobody qualifies”. You still have to assess staff and complete the declaration of compliance.
- No written terms by day one. It is now a day-one legal right, and vague terms cause most of the disputes that follow.
- Budgeting only for the wage. Employer National Insurance, pension contributions and insurance add real cost on top of gross pay.
Frequently asked questions
How much does a first employee really cost beyond their salary?
Budget for employer National Insurance on earnings above the threshold, minimum pension contributions, employer’s liability insurance, and payroll software or bureau fees. As a rough planning figure, the true cost sits noticeably above the headline salary once these are added. The Employment Allowance can offset some of the National Insurance if you qualify.
Do I need PAYE if my employee earns very little?
Often yes. You generally must register once any HMRC trigger is met, such as paying at or above the National Insurance lower earnings limit, or the employee having another job or receiving a pension. Even below the tax threshold, registering keeps you compliant and lets you report through RTI. Check the current thresholds on gov.uk.
Can I do payroll myself, or should I outsource?
With one employee, free HMRC Basic PAYE Tools or a low-cost payroll add-on is manageable if you are organised. Many owners still prefer a bureau or accountant to handle deductions, payslips, RTI and pension filings for a modest per-payslip fee. Outsourcing reduces the risk of a filing error and frees your time for the business.
What happens if I get a right to work check wrong?
If you employ someone without the right to work and did not carry out a correct check, you face a civil penalty of up to £60,000 per worker, and knowingly employing an illegal worker is a criminal offence. A properly completed and recorded check gives you a statutory excuse. Use the online share code service and keep the result.
When exactly do my pension duties start?
Your duties start on the employee’s first day of employment, known as the duties start date. From then you must assess them, enrol anyone eligible, and complete a declaration of compliance with The Pensions Regulator within five months. Duties apply even if nobody needs to be automatically enrolled.
What to do next
- Confirm the role is genuinely an employee using HMRC’s CEST tool, then register as an employer on gov.uk today so your PAYE reference arrives before the first payday.
- Line up the compliance items in parallel: get an employer’s liability insurance quote, choose payroll software or a bureau, and set up a workplace pension with a provider such as Nest.
- Before day one, run the online right to work check, issue the written statement of particulars, and confirm the pay rate against the current National Minimum Wage.
- Plan the first 90 days: prepare equipment and logins, tighten access controls, and book weekly check-ins so the hire settles in and starts paying off.
