Payroll and Hiring: What Employers Need to Do Before Their First Hire
Hiring your first employee is a major milestone for any business. But before you bring someone on board, you need to navigate payroll, taxes, employment contracts, and pensions to stay compliant with UK employment laws.
This guide covers:
✅ How to register as an employer with HMRC and set up PAYE
✅ Understanding workplace pensions, National Insurance, and employment contracts
✅ Common payroll mistakes and how to avoid them
Let’s break it down step by step.
1. Registering as an Employer and Setting Up PAYE
📌 Step 1: Register Your Business as an Employer
Before paying your first employee, you must register as an employer with HMRC. This is required even if you’re only hiring one person.
✔️ When to Register – At least four weeks before the first payday.
✔️ How to Register – Apply online via Gov.uk.
✔️ What You’ll Get – An Employer PAYE Reference Number, which is required for payroll.
💡 Pro Tip: If you’re a sole trader hiring your first employee, you must also register your business with HMRC separately before registering as an employer.
📌 Step 2: Set Up PAYE (Pay As You Earn)
PAYE is the system HMRC uses to collect tax and National Insurance (NI) from employee wages.
To set up PAYE:
✔️ Choose payroll software (e.g., HMRC’s free tool or paid options like Sage, BrightPay).
✔️ Collect employee details (name, address, NI number, tax code).
✔️ Report payroll to HMRC every payday using RTI (Real Time Information).
🔗 Learn more: HMRC PAYE Guide
2. Understanding Workplace Pensions, National Insurance & Employment Contracts
📌 Workplace Pensions (Auto-Enrolment)
If you hire anyone earning over £10,000 a year, you must automatically enroll them in a workplace pension scheme.
✔️ Employer Contribution: At least 3% of employee wages.
✔️ Employee Contribution: At least 5%, deducted from salary.
✔️ Exemptions: Employees can opt-out, but you must still offer the scheme.
Popular pension providers include Nest, Aviva, and The People’s Pension.
🔗 Learn more: Pension Auto-Enrolment
📌 National Insurance Contributions (NICs)
As an employer, you must pay National Insurance for employees earning above £9,100 per year.
✔️ Employees pay: 8% on earnings between £12,570 and £50,270, and 2% above that.
✔️ Employers pay: 13.8% on earnings above £9,100 per employee.
🔗 More details: National Insurance for Employers
📌 Employment Contracts & Legal Obligations
Every employee must have a written contract outlining:
✔️ Job role & responsibilities
✔️ Salary & benefits
✔️ Working hours & holiday entitlement
✔️ Notice period & dismissal terms
📌 Legal Requirement: Employees must receive a written contract within two months of starting.
🔗 Template contracts: ACAS Employment Contracts Guide
💡 Pro Tip: If hiring freelancers or contractors, ensure you comply with IR35 tax rules to avoid penalties.
3. Common Payroll Mistakes & How to Avoid Them
Even small payroll errors can lead to fines, tax issues, or disputes. Here are the most common mistakes and how to prevent them.
🚨 Mistake 1: Missing Payroll Deadlines
📌 Problem: PAYE submissions must be sent on or before each payday. Late submissions may result in HMRC penalties.
✔️ Fix: Use payroll software with automatic RTI submissions to avoid fines.
🚨 Mistake 2: Incorrect Tax Codes
📌 Problem: Using the wrong tax code could mean employees overpay or underpay tax, leading to HMRC corrections.
✔️ Fix: Verify tax codes using HMRC’s online tools before processing payroll.
🚨 Mistake 3: Not Keeping Payroll Records
📌 Problem: Employers must store payroll records for at least 3 years for tax audits.
✔️ Fix: Maintain digital records of wages, tax payments, and pension contributions.
🚨 Mistake 4: Failing to Deduct National Insurance & Pension Contributions
📌 Problem: Forgetting NICs or pension deductions leads to unexpected tax bills.
✔️ Fix: Use payroll software that automatically calculates deductions each month.
🚨 Mistake 5: Not Issuing Payslips
📌 Problem: Employees are legally entitled to a payslip for every payday.
✔️ Fix: Payroll software can automate payslip generation via email or PDFs.
💡 Pro Tip: HMRC regularly audits businesses for payroll compliance—avoid fines by keeping accurate records.
Final Thoughts
Hiring your first employee comes with legal and financial responsibilities.
✅ Register as an employer and set up PAYE before hiring.
✅ Understand payroll taxes, National Insurance, and pension contributions to stay compliant.
✅ Use payroll software to avoid common payroll mistakes and automate key processes.
By setting up payroll correctly from day one, you’ll avoid legal trouble and create a smooth experience for both your business and your employees.
💬 Hiring your first employee? Drop your questions in the comments!