You've found the right person, agreed a salary, and you're ready to make an offer. Then the questions start. How do you actually pay them? When do you register with HMRC? What does an employee really cost on top of their salary?
Taking on your first employee turns you into an employer overnight, and that comes with a short list of legal duties you can't skip. The good news is the process is well-trodden. Get the setup right once and the monthly routine becomes straightforward.
This guide walks you through it: registering for PAYE, running payroll, the National Insurance and pension costs you'll carry, and the day-one paperwork the law expects. It's written for small business owners, startup founders, and first-time limited company employers. All figures are for the 2025/26 tax year.
Do I need to register as an employer?
In most cases, yes. You need to register with HMRC as an employer and set up PAYE before you start paying anyone.
PAYE (Pay As You Earn) is the system you use to deduct Income Tax and National Insurance from your employee's wages and pass it to HMRC. You also use it to report what you've paid and report pension contributions.
You must register even if the only person on the payroll is you, for example as the sole director of a limited company. So if you've already incorporated and you're about to pay yourself a salary, the same rules apply.
There's a narrow exception. You may not need to register straight away if you only pay employees below the Lower Earnings Limit, none of them have another job or a pension, and you're not providing taxable expenses or benefits. The Lower Earnings Limit for 2025/26 is £125 a week, £542 a month or £6,500 a year. In practice, most employers will need to register, so when in doubt, register.
How do I set up PAYE with HMRC?
The headline rule is simple: register before your first payday. HMRC says you must register before the first payday to get your employer PAYE reference number, and you cannot register more than two months before you start paying people.
Registration can take up to a few weeks for the reference number to arrive, so don't leave it to the last minute. A sensible window is around four to six weeks before payday.
Here's the order of events:
- Register as an employer on GOV.UK. A limited company with up to nine directors can usually register online.
- Receive your employer PAYE reference and Accounts Office reference from HMRC.
- Choose payroll software that's recognised by HMRC, or appoint someone to run payroll for you.
- Run your first payroll and send a Full Payment Submission (FPS) to HMRC on or before payday.
If you genuinely have to pay someone before your PAYE reference arrives, you can still run payroll, store the submission, and send a late FPS once you're registered. It's far cleaner to register in good time and avoid that.
What does payroll actually involve?
Every time you pay your employee, payroll does three jobs: it calculates the deductions, it produces a payslip, and it reports the figures to HMRC.
The main deductions from a typical employee's pay are:
| Deduction | Who pays it | 2025/26 detail |
|---|---|---|
| Income Tax | Employee | Based on their tax code; 20% basic rate on taxable income up to £37,700 above the personal allowance |
| Employee National Insurance | Employee | 8% on earnings between the Primary Threshold (£12,570/yr) and Upper Earnings Limit (£50,270/yr), then 2% above |
| Employer National Insurance | You | 15% on earnings above the Secondary Threshold of £5,000/yr |
| Pension contributions | Both | Employer minimum 3%, employee 5% of qualifying earnings (see below) |
Income Tax bands and rates are set by HMRC, and the National Insurance thresholds come from the employer rates and thresholds for 2025/26.
Each payday you send a Full Payment Submission to HMRC telling it what you paid and what you deducted. You then pay HMRC the tax and National Insurance you've collected, normally monthly. You also give your employee a payslip showing their gross pay, deductions and net pay. If you want to sanity-check what someone will take home before you make an offer, our payslip calculator and National Insurance calculator are a quick way to model it.
What will my first employee really cost?
This is the figure most first-time employers underestimate. The salary you advertise is not the full cost. On top of gross pay you'll usually carry employer National Insurance and an employer pension contribution.
Illustrative example: hiring Sam on £30,000 a year (2025/26)
Sam is 30, works full-time in the UK, and earns £30,000. Here's the employer's side of the cost.
| Cost element | Calculation | Annual cost |
|---|---|---|
| Gross salary | Agreed figure | £30,000.00 |
| Employer National Insurance | (£30,000 - £5,000) x 15% | £3,750.00 |
| Employer pension (auto-enrolment) | (£30,000 - £6,240) x 3% | £712.80 |
| Total employer cost | £34,462.80 |
The employer National Insurance uses the Secondary Threshold of £5,000 and the 15% employer rate for 2025/26. The pension figure uses the statutory minimum employer contribution of 3% on qualifying earnings, which for 2025/26 is the band between £6,240 and £50,270.
So a £30,000 salary actually costs around £34,463 a year before you add anything else. Budget realistically: employer's liability insurance, recruitment, equipment, software, and any benefits all sit on top of this.
If you're a growing company weighing up that first hire, our pages for limited companies and startups explain how we help founders plan headcount and cash flow. Sectors with shift patterns, like hotels and restaurants, have extra payroll quirks worth getting right from the start.
What are my legal obligations as an employer?
Beyond payroll, becoming an employer brings a set of duties that apply from the moment someone starts. Here are the main ones.
Employers' liability insurance
You must have employers' liability insurance as soon as you become an employer, with cover of at least £5 million from an authorised insurer. You can be fined £2,500 for every day you're not properly insured, and £1,000 if you don't display or produce the certificate when asked. There's a narrow exemption if you only employ close family members.
Right to work checks
Before someone starts, you must check they have the legal right to work in the UK. Doing this correctly gives you a statutory defence if it later turns out the person couldn't work here.
Written statement of employment particulars
Every employee and worker is entitled to a written statement of the main terms of their employment. The principal statement must be given on or before the first day and covers pay, hours, holiday, job title, start date and place of work, among other things.
Pay at least the minimum wage
You must pay at least the National Minimum Wage or National Living Wage. For the year from 1 April 2025, the National Living Wage for workers aged 21 and over is £12.21 an hour, with £10.00 for 18 to 20 year olds and £7.55 for under-18s and apprentices in the first year. Rates change every April, so check before each pay review.
Getting the contract and statutory paperwork right is exactly the kind of thing our company secretarial service and bookkeeping service are built to handle, so nothing slips through the cracks in those busy first weeks.
What pension duties do I have?
Automatic enrolment is a legal duty, not an optional perk. Your pension responsibilities start the day your first member of staff begins working for you, known as your duties start date.
You must automatically enrol any member of staff who:
- is aged between 22 and State Pension age,
- earns at least £10,000 a year, and
- normally works in the UK.
For staff who meet those criteria, the minimum total contribution is 8% of qualifying earnings, of which at least 3% must come from you as the employer. Qualifying earnings for 2025/26 are the band between £6,240 and £50,270 a year. The employee makes up the rest, with part of their share coming from tax relief.
Staff who don't meet the auto-enrolment criteria may still have the right to ask to join a scheme, and in some cases you'll have to contribute. You also have to write to your new starter explaining how automatic enrolment affects them, and complete a declaration of compliance with The Pensions Regulator.
A step-by-step checklist before the first payday
Use this as your run sheet. Work backwards from your employee's start date.
- Decide the salary and cost it fully, including employer National Insurance and pension. Model it with our payslip calculator.
- Register as an employer with HMRC and set up PAYE, ideally four to six weeks before the first payday.
- Get employers' liability insurance in place before day one.
- Carry out a right to work check before the employee starts.
- Issue the written statement of employment particulars on or before the first day.
- Choose HMRC-recognised payroll software or appoint a payroll provider.
- Set up a workplace pension scheme and prepare your auto-enrolment communications.
- Run the first payroll and send your Full Payment Submission on or before payday.
Tick these off and your first hire will go live with no nasty surprises from HMRC.
FAQs
When do I need to register as an employer with HMRC?
You must register before your first payday, and you cannot register more than two months before you start paying people. Because the PAYE reference number can take a few weeks to arrive, aim to register around four to six weeks ahead.
How much does an employee cost on top of their salary?
For 2025/26, expect to add employer National Insurance at 15% on earnings above £5,000 a year, plus a minimum 3% employer pension contribution on qualifying earnings. On a £30,000 salary that's roughly £3,750 of employer NIC and £713 of pension, taking the total to about £34,463 before other costs.
Do I have to set up a pension for my first employee?
Yes, if they qualify. You must automatically enrol any member of staff aged between 22 and State Pension age who earns at least £10,000 a year and normally works in the UK, and contribute at least 3% of their qualifying earnings.
What is the National Minimum Wage I have to pay?
From 1 April 2025, the National Living Wage for workers aged 21 and over is £12.21 an hour. It's £10.00 for 18 to 20 year olds and £7.55 for under-18s and apprentices in their first year. The rates rise every April.
Can I pay my first employee before my PAYE reference arrives?
Yes. You can run payroll, store the Full Payment Submission, and send it to HMRC as a late submission once your employer PAYE reference comes through. It's cleaner to register in good time so you can report on or before payday.
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Ready to hire with confidence?
Taking on your first employee is a milestone. It shouldn't come with a headache. Zmartly sets up your PAYE scheme, runs your payroll, handles auto-enrolment and keeps you compliant, so you can focus on the new hire rather than the admin. Book a free call with a Zmartly accountant and we'll get your first payroll running smoothly.
