Running Payroll for Your First Employee — UK Small Business Guide (2026)

What employing someone actually means for tax

When you take on an employee, you become responsible for:

• Deducting income tax (PAYE) and employee National Insurance from their gross pay
• Paying employer National Insurance Contributions (NIC) on top of their salary
• Reporting every payment to HMRC in real time through RTI (Real Time Information)
• Enrolling eligible employees in a workplace pension scheme (auto-enrolment)
• Paying HMRC the deducted tax and your employer NIC monthly

This is a significant ongoing compliance obligation. Getting it wrong attracts automatic penalties.

Step 1 — Register as an employer with HMRC

Before you pay your first employee, register as an employer at gov.uk/register-employer. HMRC will issue your PAYE reference and Accounts Office reference. This process takes up to 5 working days — start it before the first pay date.

You cannot run payroll without these references.

Step 2 — Get payroll software

You need PAYE-compliant payroll software to calculate deductions and submit RTI reports. Options:

• Xero Payroll: Integrates with Xero bookkeeping. Straightforward, £5-£10/month per employee.
• QuickBooks Payroll: Similar integration with QuickBooks.
• FreeAgent: Included in some bank accounts (NatWest, Royal Bank of Scotland).
• Basic PAYE Tools: HMRC's free software — functional but basic.

For one or two employees, any of these work well.

Step 3 — Understand the employer NIC cost

Employer NIC is paid on top of the salary you agree — it is your cost, not deducted from the employee. In 2026/27:

• Employer NIC rate: 15% on earnings above the Secondary Threshold (£5,000/year)
• Employer NIC is not deducted from the employee's pay — it is an additional cost you pay directly to HMRC

Example: An employee earning £30,000 per year costs you:

• Gross salary: £30,000
• Employer NIC: (£30,000 - £5,000) × 15% = £3,750
• Total employment cost: £33,750 before any pension contributions

The Employment Allowance reduces your employer NIC bill by up to £10,500 in 2026/27 — most small employers with one employee benefit from this, potentially eliminating employer NIC entirely at lower salary levels.

Step 4 — Set up auto-enrolment

All eligible workers aged 22 to State Pension Age, earning above £10,000 per year, must be enrolled in a qualifying workplace pension scheme. You must:

• Choose a pension provider (NEST, The People's Pension, and Smart Pension are popular for small employers)
• Enrol eligible employees automatically from their first day
• Contribute at least 3% of qualifying earnings as employer contributions
• Ensure employees contribute at least 5% (including tax relief)

Employees can opt out, but you must enrol them first. Penalties for non-compliance start from £400.

Step 5 — Run payroll monthly (or weekly)

Your payroll software will calculate:

• Gross pay
• Income tax (using the employee's tax code)
• Employee NIC
• Pension contributions
• Net pay (what the employee receives)

After each payroll run, submit the Full Payment Submission (FPS) to HMRC through your software on or before the pay date. This RTI submission tells HMRC what each employee was paid and what was deducted.

Paying HMRC

You pay the deducted tax (employee income tax + employee NIC + employer NIC) to HMRC by the 19th of the month following payroll (22nd if paying electronically). So payroll run in July is paid to HMRC by 22 August.

Your payroll software will tell you exactly how much to pay and HMRC's payment reference.

When you have no PAYE to pay

If you have no employees in a particular month, you still need to submit a nil Employer Payment Summary (EPS) to HMRC to avoid them assuming you have simply not paid. Your payroll software handles this.

Record-keeping

Keep payroll records for at least 3 years after the tax year end — longer (6 years) is recommended. Records include payslips, P60s, P45s, RTI submissions, and details of pension enrolment.