A New Employer Guide To Payroll

Taking on your first employee is a big moment. It often means the business has reached the point where you simply cannot or don't want to do everything yourself anymore. You've found the right person, agreed their hours and salary and decided when they're going to start. Excellent!

Now you just need to pay them. Except, unfortunately, becoming an employer involves slightly more than transferring some money into their bank account every Friday and writing “wages” in the bookkeeping.

There are registrations to complete, information to collect, payroll calculations to make, HMRC reporting requirements, National Insurance, pensions and ongoing responsibilities. That doesn't mean becoming an employer needs to be frightening. It just needs setting up properly.

If you're about to employ somebody for the first time, here's what you need to know from a payroll and bookkeeping perspective.

First question: are they actually an employee?

Before setting up payroll, establish the relationship you're actually creating. Occasionally we'll hear “Can we just make them self-employed? It's easier.” Unfortunately, that's not how employment status works.

Calling somebody self-employed doesn't necessarily make them self-employed. The reality of the working relationship matters. HMRC has guidance and its Check Employment Status for Tax tool to help businesses determine the tax status of someone they're engaging. Getting this wrong can leave the business responsible for PAYE and National Insurance that should have been accounted for.

Don't choose employment status according to whichever option involves the least paperwork. Establish it properly.

Can you actually afford an employee?

One of the biggest mistakes new employers make is thinking “I'm paying them £30,000, so they'll cost me £30,000.” They won't because the salary is only part of the cost.

For the 2026/27 tax year, the standard rate of employer's Class 1 National Insurance is 15% on relevant earnings above the Secondary Threshold, which is currently £5,000 a year.

Take a straightforward employee earning £30,000 a year. Ignoring any special National Insurance categories, you'd broadly be looking at:

Cost	Approximate annual amount
Gross salary	£30,000
Employer's NI	£3,750
Salary + employer's NI	£33,750
Plus	Employer pension contribution where applicable
Plus	Equipment, software, training and other employment costs

The £30,000 employee is already costing around £33,750 before we've considered pension contributions or any of the practical costs of employing them. That's why payroll costs should be budgeted before you advertise the role, not discovered afterwards.

What about Employment Allowance?

This can make quite a difference for eligible small employers. For 2026/27, Employment Allowance can reduce an eligible employer's Class 1 National Insurance bill by up to £10,500 for the tax year but don't automatically assume you'll receive it. There are eligibility rules. For example, a limited company with only one director cannot claim where that director is the only employee attracting employer's Class 1 National Insurance. Circumstances can change when additional employees are taken on, so eligibility should be checked properly. For an eligible small employer, Employment Allowance can substantially reduce the actual employer NI payable.

Don't forget minimum wage

Even if you're agreeing an annual salary, employers need to ensure they're complying with National Minimum Wage requirements. From 1 April 2026, the main rates are:

Age/category	Minimum hourly rate
Age 21+	£12.71
Age 18–20	£10.85
Under 18	£8.00
Qualifying apprentice rate	£8.00

The apprentice rate has specific eligibility conditions.

Don't assume an annual salary automatically means everything is fine. Actual working arrangements and hours can matter when assessing minimum wage compliance.

What about contracts, policies and all the HR stuff?

This is where we're going to stay in our lane. We're payroll and bookkeeping professionals, not HR or employment-law specialists.

Taking on an employee creates responsibilities beyond payroll. Depending on your circumstances, you'll need to consider things including employment terms and written particulars, right-to-work checks, Employers' Liability insurance, health and safety, data protection and appropriate workplace policies. Employers need to carry out the appropriate right-to-work check before employing somebody, and most employers are required to hold Employers' Liability insurance with cover of at least £5 million. These are real employer responsibilities but they aren't payroll advice.

This is the point at which we'd recommend speaking to an appropriate HR or employment-law professional to make sure you've got that side of becoming an employer covered properly.

Register with HMRC as a new employer

Once you know you're going to employ somebody, you'll normally need to register with HMRC as an employer.

HMRC says you must register before the first payday to obtain your employer PAYE reference, but you cannot register more than two months before you start paying people. Registration gives you important references used in administering PAYE, including your employer PAYE reference and Accounts Office reference. Don't leave this until payday.

HMRC does have a procedure where an employee needs paying before the PAYE reference arrives, but “we'll sort payroll registration after we've paid them” isn't a great onboarding strategy.

Get ahead of it.

What does payroll need for a new employee?

Your payroll provider needs information before they can calculate somebody's wages correctly.

Typically, that will include things such as:

• full name, address and date of birth;

• National Insurance number;

• start date;

• agreed salary or hourly rate and hours;

• payment frequency;

• relevant bank/payment details;

• P45 from their previous employment where available;

• information needed for student or postgraduate loan deductions; and

• other relevant payroll information.

Preferably this arrives before 4.55pm on payday.

Payroll software is clever. It is yet to develop the ability to psychically determine the name, salary and tax circumstances of the mystery employee you forgot to mention.

What if they don't have a P45?

Don't panic. An employee may not have a P45 for perfectly legitimate reasons. Perhaps this is their first job, they've lost it or they haven't received one from their previous employer. HMRC provides a Starter Checklist for this situation. The employee provides information about their circumstances, which helps the employer establish the appropriate tax treatment until HMRC provides any subsequent tax-code instructions.

No P45 does not mean no payroll. It means we need the appropriate starter information instead.

What actually happens when payroll is run?

Let's remove some of the mystery. Broadly, payroll starts with the employee's gross pay. The payroll software then calculates applicable deductions such as:

• Income Tax

• Employee National Insurance

• Pension contributions

• Student or postgraduate loan deductions

• Any other appropriate deductions.

The amount remaining is the employee's net pay. That's what normally reaches their bank account but there's another side to the calculation. The employer may also have additional costs, including Employer's National Insurance and Employer pension contributions.

Payroll information is then reported to HMRC through Real Time Information (RTI), principally using a Full Payment Submission (FPS).

The important point is that payroll isn't simply a calculation of what to transfer to your employee.

It's also calculating and reporting liabilities to other organisations.

The £2,000 bank payment isn't your wage cost

This is an important bookkeeping point. Suppose £2,000 reaches your employee's bank account.

It can be tempting to reconcile that transaction and record Wages – £2,000 Job done! Except £2,000 was their net pay. It isn't necessarily the cost of employing them. The bookkeeping needs to recognise the gross wage together with relevant employer costs and the liabilities created by payroll.

A payroll journal might therefore include:

• Gross wages – business expense

• Employer's NI – additional business expense

• Employer pension contribution – additional business expense

while amounts due to HMRC and the pension provider sit as liabilities until they're paid.

The exact journal depends on the payroll and bookkeeping setup, but the principle matters. Net wages are not the same as gross wages, and neither necessarily represents the total cost of employing somebody. This is why properly posting payroll reports into the bookkeeping is important.

Some of the money belongs to HMRC

When payroll deducts Income Tax and employee National Insurance from somebody's gross salary, that money doesn't become spare cash for the business. It forms part of the PAYE liability that needs paying to HMRC, together with employer's National Insurance and other relevant amounts.

HMRC's normal electronic-payment deadline is the 22nd of the following tax month for employers paying monthly. Employers permitted to pay quarterly have until the 22nd after the end of the quarter.

Don't look at the bank account after payday and assume “Excellent, payroll is paid and all that money left over is ours.” Some of it may already have HMRC's name on it. Good bookkeeping helps you see that liability clearly.

Then there are workplace pensions

This deserves an entire blog of its own and we'll write one. For now, new employers need to understand one important thing. Workplace pension duties begin when your first member of staff starts work. That doesn't necessarily mean every employee will automatically be enrolled. ligibility depends on factors including age and earnings.

Currently, an employee will generally need to be automatically enrolled if they're aged between 22 and State Pension age, ordinarily work in the UK and earn at least £10,000 a year but even where your first employee doesn't meet the automatic-enrolment criteria, that doesn't necessarily mean you can forget about pensions altogether. Employers still have duties, including assessing staff and completing the appropriate declaration of compliance to The Pensions Regulator

The Pensions Regulator says employers normally need to write to staff about how automatic enrolment applies to them within six weeks of the duties start date and complete a declaration of compliance within five months. We'll tackle contributions, qualifying earnings, postponement, opt-ins, opt-outs and the rest of the pension alphabet soup in our dedicated workplace pensions guide.

For now, the message is simple. Don't wait until you've run the first few payrolls before thinking about pensions.

Holiday and sickness need systems too

Holiday entitlement and holiday pay are another subject deserving their own guide, particularly because the rules can vary depending on working patterns. We'll come back to that in a future blog.

From a payroll perspective, though, you need a reliable way to record things such as holiday taken, sickness absence, other leave and changes in working arrangements.

Payroll needs accurate information. If nobody has kept a record of how much holiday someone has taken, payroll cannot magically recreate it six months later.

What if my employee is sick or has a baby?

Employers can also become responsible for administering statutory payments. That can include Statutory Sick Pay and, where eligibility conditions are met, payments relating to maternity, paternity, adoption, shared parental leave, parental bereavement and neonatal care. We've already covered these in detail in our guide to statutory payroll payments, so there's no need to turn this article into a repeat performance.

The important thing for a new employer is understanding that these responsibilities exist and they don't necessarily work on the basis of “We pay it and HMRC gives it all back.” They don't. For example, Statutory Sick Pay is currently not recoverable from HMRC, whereas qualifying statutory family-related payments have separate recovery rules.

Running payroll doesn't end on payday

Once somebody is employed, payroll becomes a regular business process. Every pay period you'll need accurate information about things such as:

• hours worked;

• overtime or bonuses;

• sickness and leave;

• salary changes;

• new deductions;

• pension information;

• starters and leavers.

Payroll is calculated and reported, employees receive their payslips and net wages, HMRC liabilities are paid and pension contributions are dealt with.

At the end of the tax year there are further requirements, including providing employees with P60s where applicable. We'll save the full Payroll Year End Guide for next year when it's actually useful rather than subjecting you to it in October.

Five mistakes first-time employers can avoid

There are a few themes we see repeatedly.

1. “We'll just make them self-employed.”

You don't get to choose employment status simply because one option involves less administration.

2. Budgeting only for the salary.

A £30,000 employee doesn't necessarily cost £30,000. Factor in employer's NI, pension contributions and the wider costs of employment.

3. Forgetting about pensions.

Your automatic-enrolment duties start with your first member of staff not when you eventually get around to researching workplace pensions.

4. Leaving PAYE registration until the last minute.

Register in good time before the first payday.

5. Forgetting to tell payroll you've employed somebody.

Please don't introduce us to Susan at 4.55pm with “She's been working here since the 12th. We're paying her today. What do you need?” The answer is going to be; Quite a lot, actually.

Your first employee is a milestone

Taking somebody on for the first time can feel like a huge step because it is. You're no longer simply responsible for generating enough money to support yourself and your business. Someone else is now relying on you to calculate and pay their wages correctly and on time. That deserves proper systems.

Before their first payday, make sure you've established whether they're genuinely an employee, understood what they're actually going to cost, dealt with the HR and employment-law requirements, registered as an employer and provided payroll with the information it needs. Think about workplace pensions from the beginning. Keep accurate holiday and absence records. Understand when HMRC needs paying and make sure the bookkeeping records the whole payroll cost, not simply whatever amount landed in your employee's bank account.

You don't need to become a payroll expert just because you've become an employer but you do need to understand your responsibilities and make sure the right people are looking after the parts you choose to outsource.

Your first employee is a sign that your business is changing. Get the foundations right before their first payday, and becoming an employer becomes considerably easier to manage.