Hiring your first employee is one of the most significant steps you'll take as a small business owner or sole trader. It's a sign that things are going well — but it also comes with a new set of responsibilities that can feel daunting. Chief among them is PAYE: Pay As You Earn. This is the system HMRC uses to collect Income Tax and National Insurance Contributions (NICs) directly from your employees' wages. Get it wrong and you face penalties; get it right and you'll have a solid foundation for growing your team. Here's exactly what you need to do.
Step 1: Register as an Employer with HMRC
Before you can pay anyone, you must register as an employer with HMRC. You need to do this before your employee's first payday — and ideally at least two weeks in advance, because HMRC can take up to five working days to process your registration and issue your PAYE reference numbers.
You can register online via HMRC's Government Gateway. Once approved, you'll receive two reference numbers:
- Employer PAYE reference — a ten-character code used on all correspondence and payroll submissions
- Accounts Office reference — a thirteen-character reference used when you make payments to HMRC
Keep both safe. You'll need them every single time you interact with HMRC regarding payroll. It's also worth setting up a dedicated HMRC online account if you haven't already, as this is where you'll manage submissions going forward.
Step 2: Gather the Right Information from Your Employee
To set up your employee on payroll correctly, you need several pieces of information before their first pay run. Missing any of these can cause errors in tax codes, which means your employee could end up paying too much or too little tax — and you'll have to sort it out later.
Collect the following from your new starter:
- Full legal name, address, and date of birth
- National Insurance number
- A completed starter checklist (formerly the P46) — this tells you whether they have another job, a student loan, or are claiming the Marriage Allowance
- Their P45 from a previous employer, if they have one
The starter checklist determines which tax code to apply initially. If your employee hands over a P45, use the tax code shown there. Without a P45, the checklist guides you to the correct emergency or cumulative code. Using the wrong code is one of the most common first-time payroll mistakes, so take care here.
Step 3: Understand Tax Codes, NICs, and What to Deduct
Once you have your employee's details, you need to calculate what to deduct from each pay packet. There are two main deductions: Income Tax and National Insurance.
Income Tax is calculated based on the employee's tax code. The most common code for the 2024/25 tax year is 1257L, which gives a personal allowance of £12,570. Earnings above this threshold are taxed at 20% (basic rate), 40% (higher rate above £50,270), or 45% (additional rate above £125,140). Your payroll software handles the maths once you enter the correct code.
National Insurance Contributions are calculated separately. For 2024/25, employees pay 8% NICs on earnings between the Primary Threshold (£12,570 per year) and the Upper Earnings Limit (£50,270), and 2% on earnings above that. As an employer, you also pay secondary Class 1 NICs at 13.8% on earnings above the Secondary Threshold (£9,100 per year) — this is your cost, not deducted from your employee's pay.
If your total annual NICs bill is less than £100,000, you're likely eligible for the Employment Allowance, which reduces your employer NICs liability by up to £5,000 per tax year. Claim it through your payroll software when submitting your first Employer Payment Summary — it's free money that many small businesses miss.
Step 4: Submit Real Time Information (RTI) to HMRC
Under Real Time Information (RTI), you must report payroll data to HMRC on or before each payday — not monthly in arrears. This is done through two key submissions:
- Full Payment Submission (FPS) — sent every payday, containing each employee's gross pay, tax deducted, NICs, and year-to-date figures
- Employer Payment Summary (EPS) — sent when you're not paying any employees in a given month, or to reclaim statutory payments and claim the Employment Allowance
Missing or late FPS submissions attract automatic penalties, starting at £100 per month for employers with one to nine employees. HMRC takes RTI seriously, so punctuality matters. This is where having the right payroll software makes a genuine difference.
BizHub365 handles RTI submissions directly via HMRC's API — meaning you send your FPS and EPS from within the platform without needing bridging software or a separate Government Gateway login for each submission. For a first-time employer juggling everything else that comes with a growing business, that kind of integration removes a real administrative burden.
Step 5: Pay HMRC and Keep Your Records Straight
Collecting tax and NICs from your employee is only half the job. You also need to pay those amounts — plus your own employer NICs — over to HMRC. Payments are due by the 22nd of the month following the tax month end (or the 19th if paying by post). The tax month runs from the 6th to the 5th, so for wages paid in April, your PAYE payment is due by 22nd May.
Set a calendar reminder. Late payments incur interest and, after repeated failures, surcharges. Use your Accounts Office reference when making the payment so HMRC can allocate it correctly.
On the record-keeping side, you're legally required to retain payroll records for at least three years after the end of the tax year they relate to. This includes payslips, FPS records, and any correspondence with HMRC about tax codes or student loan deductions. Most payroll software stores this automatically, but it's worth confirming your provider's data retention policy.
Don't forget your obligations to your employee either. You must provide a payslip on or before every payday — a legal requirement under the Employment Rights Act 1996. At the end of each tax year (5th April), you must also issue a P60 to every employee still on your books, no later than 31st May.
Conclusion: Get the Foundations Right and Payroll Becomes Routine
PAYE feels complicated the first time because there are several moving parts arriving all at once: registration, starter forms, tax codes, RTI deadlines, and payment schedules. But once you understand the structure, it becomes a predictable, manageable routine. Register early, collect the right information, use software that automates your RTI submissions, and pay HMRC on time every month.
Many small business owners find that the administrative side of employing someone — payroll, compliance, records — takes far less time than they feared, provided they have the right systems in place from the start. If you're looking for a single platform that handles payroll alongside your invoicing, accounting, and HMRC submissions, it's worth exploring what BizHub365 offers at bizhub365.co.uk. Taking on your first employee is a big step. The paperwork doesn't have to be.