Taking on your first member of staff is one of the most significant milestones in any small business journey. It’s a sign that things are going well — well enough that you can’t do it all yourself anymore. But alongside the excitement comes a surprisingly long list of responsibilities that many first-time employers simply aren’t prepared for.
This isn’t meant to put you off. Hiring the right person at the right time can genuinely transform a business. But going in without understanding your legal and financial obligations can lead to costly mistakes — some of which carry real penalties from HMRC.
Here’s what you need to have in place before your first employee walks through the door.
Register as an Employer With HMRC
Before anything else, you need to register as an employer with HMRC. You should do this before your new employee’s first payday — and ideally at least two weeks in advance, as it can take time for your PAYE reference to come through.
Once registered, HMRC will issue you with an employer PAYE reference number and an Accounts Office reference. You’ll need both to run payroll and make payments to HMRC. You cannot legally pay an employee without being registered, so this step needs to happen early.
If you’re currently operating as a sole trader and this is your first hire, it’s also worth reviewing how your overall business structure is working. Our post on sole trader advantages covers the key considerations — including when it might make more sense to move to a limited company structure as you grow.
Understand Your Payroll Obligations
Running payroll is not simply a matter of transferring wages into someone’s bank account. As an employer, you’re responsible for:
- calculating and deducting income tax through PAYE
- calculating and deducting employee National Insurance contributions
- calculating and paying employer National Insurance contributions on top of wages
- enrolling eligible employees into a workplace pension
- submitting a Full Payment Submission (FPS) to HMRC on or before every payday
Every one of those steps needs to happen accurately and on time. HMRC takes late or incorrect payroll submissions seriously, and the penalties can add up quickly even for small errors.
Our post on 5 payroll problems small employers can avoid is essential reading before you run your first payroll — it covers the most common mistakes first-time employers make and how to avoid them.
For most small businesses, it makes far more sense to outsource this from the outset. Working with a professional payroll services Stockport provider means every submission is accurate, on time, and fully compliant — without you needing to become an expert in payroll legislation overnight.
Get Your Head Around National Insurance
National Insurance is one of the more confusing aspects of employing someone for the first time. There are two elements to be aware of.
Employee National Insurance is deducted from your employee’s wages before they receive their pay. The rates vary depending on the employee’s earnings, and they change periodically — so it’s important always to use the current rates rather than relying on figures from a previous year.
Employer National Insurance is a separate cost on top of your employee’s wages. As of April 2025, the employer NI rate increased to 15%, with the secondary threshold — the point at which you start paying — dropping to £5,000 per year. This is a significant cost that needs to be factored into your employment budget before you make a job offer.
Our post on employer NI rates has the current figures and explains how the calculation works in practice. It’s worth reading carefully so you understand the true cost of employment before you commit to a salary.
Set Up a Workplace Pension Scheme
Auto-enrolment isn’t optional. If your employee is aged between 22 and State Pension age, earns more than £10,000 per year, and works in the UK, you are legally required to enrol them into a qualifying workplace pension and make contributions.
The minimum employer contribution is currently 3% of qualifying earnings, with the employee contributing at least 5%. You need to have a pension scheme set up and your employee enrolled within six weeks of their start date — and you need to write to them explaining how auto-enrolment works.
Failing to comply with auto-enrolment rules can result in penalty notices from The Pensions Regulator, so this is one area where cutting corners is simply not worth it.
Check Your Employee’s Right to Work
Before your new employee starts, you are legally required to check that they have the right to work in the UK. This means seeing original documents — a UK passport, a biometric residence permit, or other acceptable evidence — and keeping a copy on file.
Employing someone who does not have the right to work in the UK is a serious offence that can result in civil penalties of up to £60,000 per illegal worker, as well as potential criminal prosecution. A proper right-to-work check, carried out before the start date, gives you a statutory excuse should any issue arise later.
Issue a Written Contract of Employment
You’re legally required to give every employee a written statement of employment particulars on or before their first day. This isn’t just good practice — it’s a legal obligation under the Employment Rights Act 1996.
The statement must cover key terms including job title and description, start date, place of work, working hours, salary and how it’s paid, holiday entitlement, notice periods, and sick pay arrangements. Many employers go further and produce a full employment contract that also covers confidentiality, intellectual property, and other protections — which is sensible, even if not strictly required by law.
Getting this right from the outset protects both you and your employee, and prevents misunderstandings that can escalate into employment disputes later on.
Understand Holiday Entitlement
All employees — including part-time workers — are entitled to a minimum of 5.6 weeks of paid holiday per year under UK law. For a full-time employee working five days a week, that’s 28 days including bank holidays.
You need to track holiday taken, manage requests fairly, and make sure your employee receives their correct holiday pay when they take leave. For businesses with only one or two employees, this is manageable manually — but as you grow, having a system in place prevents a great deal of administrative hassle.
Sort Out Employers’ Liability Insurance
This one is non-negotiable. If you employ anyone — even part-time or on a short-term basis — you are legally required to have employers’ liability insurance with a minimum cover of £5 million. You must display your certificate of insurance in the workplace or make it available electronically.
Failure to have valid employers’ liability insurance can result in a fine of £2,500 for every day you are not properly insured. It’s one of the easier compliance requirements to sort out, but one that’s surprisingly easy to overlook when you’re focused on everything else that comes with a first hire.
Get Your Bookkeeping Ready for the Extra Complexity
Hiring an employee doesn’t just increase your costs — it increases the complexity of your financial records. You’ll have payroll journals to account for, pension contributions to track, PAYE and NI payments to HMRC to record, and employee expense reimbursements to manage alongside your normal income and outgoings.
If your bookkeeping wasn’t already in great shape, now is the time to sort it out. A bookkeeping service for small business can take the day-to-day recording off your plate entirely, making sure your payroll costs are correctly captured and your records stay accurate as things get more complex.
It’s also worth making sure you know what employment-related records you’re required to keep and for how long. Our post on small business bookkeeping records covers the key requirements — including payroll records, which must be kept for at least three years.
A bookkeeping checklist for UK small businesses can also help you build a consistent monthly routine that accounts for the payroll-related tasks that come with being an employer.
Think About the Tax Implications for You Personally
Taking on an employee changes your cost base significantly, which in turn affects your taxable profit. If you’re a sole trader, your Self Assessment tax return will need to reflect employment costs correctly — including wages, employer NI, and pension contributions, all of which are allowable deductions.
If you’re operating as a limited company, your corporation tax return submission will need to account for staff costs in the right way. Getting this right is important — employment costs are a major deductible expense, and making sure they’re claimed correctly can make a meaningful difference to your tax bill.
Working with an accountant Stockport businesses rely on means your accounts reflect your employment costs accurately from the start, so you’re not leaving allowable deductions on the table.
Consider Management Accounts as You Scale
Once you’ve got people on the payroll, your finances become harder to manage by instinct alone. Wages are often your biggest single expense, and understanding how staff costs are affecting your margins in real time — not just at year-end — is important.
Management accounts for small business give you a structured monthly view of income, costs, and profitability. When payroll is a significant line in your accounts, seeing that figure in the context of your overall performance every month helps you make better decisions about hours, overtime, and headcount as your business grows.
Our post on management accounts vs year-end accounts explains the difference and why growing businesses benefit from both.
Thinking Beyond the UK?
If your longer-term ambitions involve expanding internationally — for example, if you’re exploring Dubai relocation services for UK businesses as part of a growth strategy — it’s worth noting that employment structures, tax obligations, and payroll requirements differ significantly between jurisdictions. Getting your UK foundations right before you expand is always the sensible starting point.
And for businesses that are growing rapidly and want to use Xero accounting software to manage payroll, expenses, and financial reporting in one place, integrating your systems early makes scaling much more straightforward.
Frequently Asked Questions
When do I need to register as an employer with HMRC? You should register before your first employee’s payday — ideally at least two weeks in advance. HMRC advises not to register more than two months before you start paying employees, so timing it right is important.
Do I have to provide a payslip? Yes. All employees are legally entitled to a payslip on or before every payday. It must show gross pay, deductions (including tax and NI), and net pay. Failure to provide payslips is a breach of employment law.
What is the Employment Allowance and can I claim it? The Employment Allowance lets eligible employers reduce their annual National Insurance liability by up to £10,500 per tax year (from April 2025). Most small businesses with at least one employee qualify, but there are some exclusions — including companies where the sole employee is also the director. It’s worth checking your eligibility.
Can I take on someone as self-employed to avoid employer obligations? Only if they genuinely are self-employed under HMRC’s employment status rules. Incorrectly classifying an employee as self-employed — known as false self-employment — is something HMRC actively investigates, and the penalties can be significant. Always check employment status before making a decision.
Do part-time employees have the same rights as full-time employees? Yes. Part-time employees have the same statutory rights as full-time staff, including holiday entitlement (on a pro-rata basis), auto-enrolment eligibility (subject to earnings thresholds), and the right to a written contract.
What happens if I make a payroll mistake? HMRC expects errors to be corrected promptly. Minor mistakes can usually be corrected in the next payroll submission. Repeated errors or late submissions can attract penalties, however, so it’s better to seek professional support than to risk getting it wrong.
Ready to Hire With Confidence?
Bringing on your first employee is a big step — and getting the foundations right from the start means you can focus on growing your business rather than firefighting compliance issues later on.
At U&W Chartered Accountants, we work with small businesses across Stockport to help them navigate payroll, tax, and financial management at every stage of growth — including the transition from sole operator to employer.
Get in touch today for a free initial consultation and let’s make sure your first hire is set up properly from day one.
