Hiring your first employee is one of the biggest steps a business can take. It means you’re growing.
But it also means you’re stepping into a world of employer obligations – PAYE registration, payroll reporting, pension auto-enrolment, employment contracts, and National Insurance – that didn’t exist when it was just you.
Here’s a step-by-step guide to everything you need to do when you hire your first member of staff.
Before They Start: The Setup
Register as an Employer with HMRC
You must register as an employer with HMRC before your new employee’s first payday. You can do this up to two months in advance. HMRC will issue you a PAYE reference number, which you’ll use for all payroll submissions.
Registration is done online and usually takes a few days to process. Don’t leave it to the last minute – you need the reference number before you can run your first payroll.
Get Payroll Software
You need a way to calculate tax and National Insurance deductions and report them to HMRC. This is done through payroll software that submits Real Time Information (RTI) – a report sent to HMRC every time you pay an employee.
There are plenty of options. HMRC offers free Basic PAYE Tools for employers with fewer than 10 employees. Commercial software like Xero, QuickBooks, or Sage handles payroll alongside your other bookkeeping. Or you can outsource the whole thing to an accountant.
Set Up a Workplace Pension
Under auto-enrolment, you have pension duties from the day your first employee starts – this is your “duties start date.” You need to choose a qualifying pension scheme before your employee begins work.
Not every employee will need to be enrolled (it depends on their age and earnings), but you still need a scheme in place and you need to assess each employee against the criteria. More on this below.
Take Out Employers’ Liability Insurance
This is a legal requirement for almost all businesses with employees. You must have employers’ liability insurance of at least £5 million, and you need to display the certificate (or make it available) at your workplace. Fines for not having cover can be up to £2,500 per day.
The Employment Contract
From day one, you must provide your employee with a written statement of employment particulars. This is a legal requirement under the Employment Rights Act – it’s not optional, and it must be given on or before their first day of work.
The statement must include:
- The employer’s name and the employee’s name
- Job title or description of duties
- Start date (and the date continuous employment began, if different)
- Pay rate, frequency, and method of payment
- Working hours and days
- Holiday entitlement (minimum 5.6 weeks for full-time staff, including bank holidays if applicable)
- Place of work
- Notice periods
- Pension arrangements
- Probationary period details (if any)
- Sick pay terms
Getting this right protects both you and the employee. If there’s ever a dispute, the written statement is the first document a tribunal will look at.
Running Payroll: What You Owe HMRC
Every time you pay your employee, your payroll software calculates the deductions and you submit an RTI report to HMRC – specifically, a Full Payment Submission (FPS). This must be sent on or before each payday.
What Gets Deducted
There are three main elements:
- Income tax: deducted from the employee’s pay based on their tax code. For most new starters, this will be 1257L (the standard code reflecting the £12,570 personal allowance).
- Employee National Insurance: 8% on earnings between £1,048 and £4,189 per month, plus 2% above that.
- Student loan repayments: if applicable, based on the loan plan type your employee declares on their starter checklist.
What You Pay as the Employer
On top of what you deduct from the employee, you owe employer’s National Insurance. For 2026/27, the rate is 15% on earnings above the secondary threshold of £5,000 per year (roughly £417 per month).
This is a cost to the business, not a deduction from the employee’s pay. It’s one of the things that catches new employers by surprise – the true cost of an employee is always higher than their salary alone.
Employment Allowance
If you’re eligible, the Employment Allowance reduces your employer NIC bill by up to £10,500 per year. Most small businesses with more than one person on the payroll qualify.
For many first-time employers, this allowance can wipe out most or all of the employer NIC for the first year. It’s claimed through your payroll software.
Payment to HMRC
You must pay the total PAYE due – income tax deducted, employee NIC, and employer NIC – to HMRC by the 22nd of the following month (19th if paying by post). If your average monthly PAYE liability is under £1,500, you may be able to pay quarterly instead.
Pension Auto-Enrolment
Every employer must assess their staff for pension auto-enrolment. An employee must currently be enrolled if they are aged between 22 and State Pension age and earn over £10,000 per year (£833 per month).
The minimum contributions for 2026/27 are:
- Employer: at least 3% of qualifying earnings
- Employee: at least 5% of qualifying earnings
- Total: 8%
Qualifying earnings are the portion of pay between £6,240 and £50,270 per year. So for an employee earning £30,000, qualifying earnings are £23,760, and the employer’s minimum contribution would be around £713 per year.
You must enrol eligible employees from their start date and write to them explaining the scheme. Even if an employee wants to opt out, you have to enrol them first – they can opt out afterwards.
The Pensions Regulator takes enforcement seriously. Penalties for non-compliance start at £400 per day for small employers and escalate quickly.
Choosing a Pension Scheme
For most small businesses, NEST (the National Employment Savings Trust) is the easiest option.
It’s a government-backed scheme that accepts all employers regardless of size, has no setup costs, and handles most of the admin online.
Other qualifying schemes are available through pension providers, but NEST is the default for businesses that don’t already have a scheme in place.
The Real Cost of an Employee
New employers often budget only for salary. In reality, the cost is meaningfully higher. On top of the gross salary, you’ll be paying:
- Employer NIC at 15% on earnings above £5,000 (offset by Employment Allowance)
- Pension contributions of at least 3% of qualifying earnings
- Employers’ liability insurance
- Payroll processing costs (software or accountant fees)
- Statutory payments if the employee is off sick, on maternity/paternity leave, etc.
As a rough guide, total employment costs typically run at 1.25 to 1.4 times the gross salary for a standard role. On a £30,000 salary, that means budgeting around £37,500 to £42,000 per year for the true cost.
Minimum Wage
You must pay at least the National Minimum Wage – the rate depends on the employee’s age. From April 2026, the rates are:
- Age 21 and over (National Living Wage): £12.71 per hour
- Age 18 to 20: £10.85 per hour
- Under 18: £8.00 per hour
- Apprentice rate: £8.00 per hour
These rates apply from 1 April 2026. HMRC actively investigates minimum wage compliance, and the penalties for underpayment are harsh – up to 200% of the arrears owed to the worker.
Employment Law Basics
Hiring your first employee brings you into the scope of employment law. A few key obligations to be aware of from the outset:
- Holiday entitlement: all employees are entitled to at least 5.6 weeks of paid annual leave (28 days for full-time staff). This can include bank holidays.
- Statutory Sick Pay: from April 2026, SSP is payable from the first day of sickness (the previous three waiting days have been removed) and the lower earnings limit no longer applies. This means more employees qualify and payments start sooner.
- Paternity and parental leave: from April 2026, paternity leave and unpaid parental leave are day-one rights – employees no longer need 26 weeks of service to qualify.
- Working time: employees generally cannot be required to work more than 48 hours per week unless they’ve opted out in writing.
- Right to work: you must check that every employee has the legal right to work in the UK before they start. Failure to do so can result in a fine of up to £60,000 per illegal worker.
Keeping Records
You’re required to keep payroll records for at least three years after the end of the tax year they relate to. These include pay details, tax and NIC deductions, RTI submissions, and records of statutory payments.
Employment records – contracts, performance reviews, disciplinary actions – should be kept for the duration of employment and for a reasonable period afterwards (six years is standard practice to cover any potential tribunal claims).
How Double Point Can Help
Taking on your first employee involves more moving parts than most business owners expect. Getting PAYE, pensions, and employment law right from the start saves you from costly corrections later.
At Double Point, we handle payroll for businesses of all sizes – from first-time employers setting up their initial PAYE scheme to growing companies with complex payroll needs.
Book a free consultation with us today and let’s get your first hire set up properly.