Making your first hire: what payroll involves

By Buzz Accounting · 3 August 2026

There are six jobs to do before your first employee's first payday. Do them in order in the fortnight before the start date. If they are left until after the employee starts, they can lead to penalties and backdated pension contributions.

This post sets out the steps at 2026/27 rates, then the full cost of the hire, including the Employment Allowance, which a company usually becomes eligible for when it takes on its first employee.

1. Register as an employer with HMRC

You need an employer PAYE reference before you can report payroll to HMRC. If the company already runs payroll for a director's salary, it is already registered and can skip this step. Two timing rules apply: you must register before the first payday, and you cannot register more than two months before you start paying people. That leaves a window of about eight weeks, so register on the day the offer is accepted.

If the reference has not arrived by payday, still pay your employee on time. Run the payroll, keep the submission, and send it as a late Full Payment Submission once the reference arrives, as HMRC's guidance sets out.

2. Check right-to-work documents, and keep the evidence

The penalties for getting this wrong are high. The civil penalty for employing someone without the right to work rose in early 2024 to a maximum of £45,000 per worker for a first breach and £60,000 per worker for a repeat breach within three years.

You have a statutory excuse against the penalty if you carry out the check in the way the Home Office prescribes before employment starts, and keep the evidence. You are then not liable even if the person turns out not to have the right to work. The excuse depends on following the prescribed process, and acting in good faith is not enough on its own. Do the check, date it, and keep the copy with the personnel file.

3. Issue the written statement of employment particulars

The principal statement must be given on the first day of employment. The rule used to allow two months, and it now applies to workers as well as employees. It has to cover names, job title, start date, pay and pay frequency, hours and how they may vary, holiday entitlement, work location, any probation period and its conditions, benefits, and any obligatory training.

A wider written statement, covering pension arrangements, collective agreements and training entitlement, follows within two months. Information on sick pay, other paid leave and notice periods is also due on day one, either in the principal statement or in a document the employee can readily access.

4. Buy employers' liability insurance

You must hold employers' liability cover of at least £5 million from the moment you become an employer. The fine is £2,500 for every day you are uninsured, and a further £1,000 for failing to display the certificate. You do not need it if you employ only family members, or only people based outside England, Scotland and Wales. Neither usually applies to a startup's first hire.

5. Set up the workplace pension

Auto-enrolment duties start on your employee's first day. You must enrol anyone aged 22 to State Pension age earning over £10,000 a year, and the minimum contribution is 8% of qualifying earnings, of which at least 3% must come from you.

Qualifying earnings are the part of pay between £6,240 and £50,270 for 2026/27. On a £30,000 salary that is £23,760 of qualifying earnings, so your 3% is £712.80 a year. NEST, the scheme set up by the government, accepts any employer and does not charge employers to set up.

You must also complete a declaration of compliance with The Pensions Regulator within five months of your duties start date. This is a separate legal duty from enrolling staff, and it applies even if your only employee has opted out.

6. Report payroll to HMRC on time

Under Real Time Information, HMRC's payroll reporting system, a Full Payment Submission must reach HMRC on or before every payday. Late filing penalties are charged monthly and depend on the number of employees: £100 a month for 1 to 9 employees, £200 for 10 to 49, £300 for 50 to 249 and £400 for 250 or more. HMRC does not charge a penalty for the first late report in each tax year.

What a £30,000 hire costs

These figures are for a company whose founder is its only director, on a £12,570 salary, hiring one person on £30,000 from 6 April 2026. The figures are illustrative and use 2026/27 rates.

Salary: £30,000
Employer National Insurance: 15% on earnings above the £5,000 secondary threshold = (£30,000 − £5,000) × 15% = £3,750
Pension: 3% of £23,760 qualifying earnings = £712.80
Employers' liability insurance, laptop, software seats: roughly £1,000–£2,500 in year one

Total cost before relief: roughly £35,500–£37,000, or about 1.18–1.23× salary.

The Employment Allowance

The Employment Allowance is £10,500 a year off your employer's Class 1 National Insurance bill. A company cannot claim it if its only employee paid above the secondary threshold is a single director, which rules out many startups before their first hire.

Once you take on an employee, the company can claim it. In the example above:

Employer NI on the new hire: £3,750
Employer NI on the founder's own £12,570 salary: (£12,570 − £5,000) × 15% = £1,135.50
Total employer NI: £4,885.50, all of it covered by the £10,500 allowance

So the company pays no employer NI in year one, on the new hire or on the founder. The total cost falls to about £31,700–£33,200, or roughly 1.06–1.11× salary. You claim the allowance through your payroll software each tax year. If you forget, you can usually still claim it later for up to four previous tax years.

Since April 2025, employers with more than £100,000 of Class 1 liabilities can also claim the allowance.

What to do this week

Register for PAYE on the day the offer is accepted, and no earlier than two months before the first payday.
Do the right-to-work check before the start date and file the dated evidence.
Draft the principal statement now so it can be handed over on day one.
Get an employers' liability insurance quote. The fine for having no cover is £2,500 a day.
Open the pension scheme and diarise the declaration of compliance for five months out.
Put the start date, the total cost and the Employment Allowance into your cashflow forecast, because the timing of hires has a large effect on how fast a startup spends its cash.

If share options are part of the package, read our guide to EMI share options. To hold EMI options, an employee must work for the company for at least 25 hours a week, or for at least 75% of their working time if that is less.

Our payroll service

We run payroll and pension administration for your first hires: payslips, reporting payroll to HMRC, starters and leavers, pension submissions and the Employment Allowance claim. The instant quote asks how many people you pay and how often, and your proposal sets out what is covered. Get started.

Common questions

When do I need to register as an employer with HMRC?

Before your first payday, and no more than two months before you start paying people. That gives you roughly an eight-week window, so register the day the offer is accepted. It takes HMRC time to issue your employer PAYE reference, and you cannot file a Full Payment Submission without it. If the reference has not arrived by payday, still pay your employee on time. Run the payroll, keep the submission, and send it as a late Full Payment Submission once the reference arrives, which HMRC's guidance allows in this situation.

How much does an employee cost on top of their salary?

Budget 1.1 to 1.25 times the headline salary before reliefs. On a £30,000 hire in 2026/27 that means £3,750 of employer National Insurance (15% above the £5,000 secondary threshold), £712.80 of pension at 3% of qualifying earnings, plus employers' liability insurance, a laptop and software seats. The Employment Allowance covers up to £10,500 of employer NI a year. On a first hire that usually covers all of the employer NI and brings the total cost down to around 1.1 times salary.

Can my company claim the Employment Allowance?

Not while your only employee paid above the £5,000 secondary threshold is a single director, which rules out many startups before their first hire. Take on one employee earning above that threshold and you become eligible, and the £10,500 allowance then covers the employer National Insurance on the new hire and on the director's own salary. Since April 2025 there is no longer an upper cut-off at £100,000 of Class 1 liabilities. You claim it through your payroll software, and you need to claim it again every tax year.

What are the penalties for getting the first hire wrong?

The main penalties are these. Employing someone without a valid right-to-work check risks a civil penalty of up to £45,000 per worker for a first breach and £60,000 for a repeat within three years, avoided only by carrying out the prescribed check beforehand and keeping the evidence. Trading without employers' liability insurance of at least £5 million costs £2,500 for every uninsured day, plus £1,000 for not displaying the certificate. Filing payroll reports to HMRC late costs £100 a month with 1 to 9 employees, though the first failure in a tax year is not penalised.

Do I still have to do anything if my employee opts out of the pension?

Yes. Enrolment and the declaration of compliance are separate duties. You must still assess the employee, enrol them if they are aged 22 to State Pension age and earning over £10,000, process any opt-out correctly within the statutory window, and complete your declaration of compliance with The Pensions Regulator within five months of your duties start date. The declaration is a legal requirement even where nobody ends up contributing. You must also re-enrol eligible staff roughly every three years, so an employee who opts out now may be enrolled again at that point.