Payroll for Your First Employee: A Step-by-Step Guide

To set up payroll for your first employee, register as an employer with HMRC before the first payday, choose payroll software, collect the employee's starter information, and report every payment to HMRC on or before payday. You also need to check their right to work, arrange employer's liability insurance and meet your workplace pension duties.

Taking on a first member of staff is a milestone, and the admin can feel daunting. The good news is that it follows a clear order. This guide sets out what to do in the weeks before they start, on their first payday, and every month after.

Key takeaways

• Register as an employer before the first payday, and no more than two months before.
• Payroll must be reported to HMRC in real time, on or before each payday.
• PAYE and National Insurance are usually paid monthly, by the 22nd if paid electronically.
• Workplace pension duties start on the day your first employee starts.
• Most employers need employer's liability insurance from day one.

What "running payroll" involves

Payroll is the process of calculating each employee's gross pay, deducting income tax, employee National Insurance, pension contributions and any student loan, and paying them the net amount — while reporting it all to HMRC through Real Time Information (RTI). As the employer you also pay employer National Insurance and pension contributions on top of wages. GOV.UK's employing staff for the first time guide lists every obligation.

Step by step: before the first payday

1. Decide the pay and contract. Confirm the rate is at least the National Minimum Wage or National Living Wage for their age, and issue a written statement of employment particulars.
2. Check the right to work in the UK before they start, and keep a record of the check.
3. Get employer's liability insurance unless an exemption applies.
4. Register as an employer using GOV.UK's employer registration service.
5. Choose payroll software that can send RTI submissions, or appoint a payroll provider.
6. Collect starter information: their P45 from a previous job, or a completed starter checklist, plus National Insurance number, date of birth and address.
7. Set up the workplace pension and diarise the declaration of compliance.

Monthly payroll tasks compared

Workplace pensions

Under automatic enrolment, your duties begin on the day your first employee starts. You must work out whether each person is eligible, enrol those who are, pay employer contributions, and write to staff about it. Within five months you must complete a declaration of compliance with The Pensions Regulator, even if nobody is eligible to be enrolled. The age and earnings thresholds are set out by The Pensions Regulator.

Employee or contractor?

Before setting up payroll, be sure the person really is an employee. Calling someone self-employed does not make them so. HMRC looks at the substance of the arrangement: whether you control how, when and where they work, whether they must do the work personally, whether they can send a substitute, and whether they take any financial risk. If the answers point to employment, they belong on payroll. HMRC's Check Employment Status for Tax tool can help you test the position.

Leavers and the end of the tax year

Payroll also has yearly and one-off tasks. When the tax year ends on 5 April, you send your final submission for the year and give every employee on the payroll a P60 by 31 May. If you provided taxable benefits, such as a company car, you may have extra reporting to do. When someone leaves, you record the leaving date in your next FPS and give them a P45. Good payroll software prompts you for most of this, but it helps to have the key dates in your diary.

Worked example (illustrative example)

"Copper Kettle Café Ltd", an invented illustrative example, plans to hire its first barista to start on 2 November 2026, paid monthly on the last working day. In late September the director registers the company as an employer, which leaves plenty of time for the references to arrive. The café arranges employer's liability insurance, carries out a right to work check and picks a workplace pension scheme.

On the barista's first day they hand over a P45, so the correct tax code can be used. On 30 November the software calculates pay and deductions, the barista gets a payslip, and the FPS goes to HMRC the same day. The PAYE and National Insurance for the tax month ending 5 December is paid electronically before 22 December 2026. The company, dates and arrangements are invented to show the sequence.

Common mistakes

• Registering too late, leaving the first payday without the references you need.
• Paying first and reporting later. The FPS is due on or before payday.
• Forgetting the pension declaration when no one is enrolled.
• Treating the worker as self-employed without checking employment status.
• Underestimating the true cost of employer NIC and pension on top of wages.

Take payroll off your plate

Our payroll service starts from £25 per month per employee and covers RTI submissions, payslips and pension reporting. Before you hire, read the true cost of an employee and check whether you can claim Employment Allowance. If you are a director deciding your own pay, see salary vs dividends.

Hiring soon and want payroll ready before day one? Get in touch or see our pricing.