Hiring your first employee: payroll basics

You signed the offer letter. Congratulations — that's the easy part. Before your new hire's first day, there's a sequence of UK admin to get right. Get it wrong, and HMRC, the Pensions Regulator or the new joiner themselves will let you know. Get it right, and the whole thing becomes invisible plumbing.

Here's the playbook we run with every client making their first hire.

Step 1 — Register as an employer with HMRC

You need to be registered for PAYE before you can pay anyone. You can do this online via gov.uk; it takes about 15 minutes, and HMRC will post (yes, post) your employer reference back within a couple of weeks. You can't run payroll without it.

Timing: register at least 2 weeks before your first payday. Don't register more than 2 months before you actually need it — HMRC will expect filings.

Step 2 — Get the new joiner's onboarding paperwork

You need three things from your hire before their first day:

• Right to Work check. Either an in-person document inspection or a Share Code through the Home Office service. Keep evidence — it's a £20,000 penalty per breach for unwitting employment of someone without the right to work.
• P45 from their previous employer (if they had one in this tax year). This tells you their tax code and year-to-date earnings.
• Starter checklist (if no P45). Gov.uk has the form; it puts them on an emergency tax code until HMRC issues the right one.

Step 3 — Set up pension auto-enrolment

The moment you have an employee aged 22+ earning over £10,000/year, you're legally required to offer a workplace pension. The Pensions Regulator will write to you. Don't ignore that letter.

Pick a provider — NEST is free and easy; Smart Pension and The People's Pension are also popular with startups. Minimum contributions are 5% from the employee, 3% from you (the employer). You can be more generous.

Note: directors-only payroll often qualifies for an "auto-enrolment exemption" — but only if the director has no employment contract. Get advice; it's a paperwork detail that matters.

Step 4 — Pick payroll software (or outsource it)

You have three options:

• HMRC's Basic PAYE Tools. Free, clunky, no pension integration, fine for one person, miserable for two.
• Xero Payroll / BrightPay / FreeAgent. Software that handles RTI, pension submissions and payslips. Generally £4–10 per employee per month. Setup takes a few hours.
• Outsource to your accountant. We run payroll for our Growth and Scale clients as part of the monthly fee. No new logins; we handle HMRC and pension submissions; you approve the run.

Step 5 — Run the first payroll

Each pay run, your software:

1. Calculates gross-to-net (deducting income tax, employee NIC and pension contributions)
2. Calculates employer NIC and employer pension contributions
3. Submits an RTI (Real Time Information) FPS to HMRC on or before the payment date
4. Generates a payslip
5. Tells you what to pay HMRC by the 22nd of the following month

You pay your employee from your business account. You pay HMRC their share separately, by the 22nd. Don't conflate the two — many first-time founders accidentally pay the gross amount and end up owing themselves money.

The real cost of a £40,000 employee

This is the bit founders don't expect. Headline salary is one number; total cost is meaningfully higher.

For an employee on £40,000:

• Gross salary: £40,000
• Employer NIC (~13.8% above the secondary threshold): roughly £4,200
• Employer pension contribution (3% above qualifying earnings): roughly £1,100
• Other employer costs: equipment, licences, training

Realistic monthly P&L hit: ~£3,800. Budget accordingly — and bake the employer costs into your cashflow forecast.

What to tell your new joiner before day one

• Their start date, contract signed
• How to send you the P45 / Starter Checklist
• Pension provider name and how to log in
• Pay date each month (e.g., last working day)
• How to get a payslip (most software has self-service)
• Holiday allowance and how to book it
• Who to ask the awkward questions

None of this needs to be a 12-page handbook. A one-page Notion doc, sent before day one, sets the tone better than a stack of forms.

The first-employee checklist

1. Register for PAYE with HMRC (allow 2 weeks)
2. Right-to-work check completed and filed
3. Employment contract signed by both parties
4. P45 received OR Starter Checklist filled out
5. Pension provider chosen and account opened
6. Payroll software set up (or outsource arrangement in place)
7. Pay date in everyone's diary
8. Employer's Liability Insurance in place (legally required from the moment they start)
9. One-page welcome doc sent

Run through that and your first payroll will be ordinary. Which is exactly what you want.

If you'd rather hand the whole thing off, our Payroll service runs from £85/month per employee, included in the Growth package. See what's included →