How to do UK payroll for your first employee

The setup (before they start)

Register as an employer

Apply online via HMRC's Government Gateway to get a PAYE referenceand an Accounts Office reference. Allow 5 working days. You can do this up to 2 months before the first pay date.

Choose a payroll system

Options:

• HMRC Basic PAYE Tools — free, ugly, works for under 10 employees
• Specialist payroll software (Moneysoft, BrightPay, Sage Payroll) — £50-200/year
• Bundled in accounting platform (Xero Payroll, QuickBooks Payroll, Ledgers) — included or small add-on
• Outsource to a payroll bureau — typically £15-30/employee/month

Get a starter checklist or P45

From your new employee. If they had a previous UK job, they bring their P45 (parts 2 + 3). If not, they fill in a starter checklist (formerly P46). Either way, you get:

• National Insurance number
• Tax code (default 1257L for 2024-26)
• Previous YTD pay + tax (from P45)
• Student loan status

Set up pension auto-enrolment

If they qualify (aged 22-State Pension Age + earning over £10k/year), you must auto-enrol them into a pension within 6 weeks of their first qualifying pay date. Default scheme for most small employers: NEST. Free to set up. Minimum contributions: 3% employer, 5% employee, on banded earnings (£6,240–£50,270).

Every pay run (typically monthly)

1. Calculate gross pay for the period — salary or hourly × hours.
2. Apply tax code to get taxable pay (most codes give a £12,570/year personal allowance).
3. Calculate income tax on taxable pay using PAYE tables (or software).
4. Calculate employee NIC (Class 1 — 8% on earnings between £12,570 and £50,270, 2% above).
5. Calculate employer NIC (15% on earnings above £5,000 — rate up from 13.8% as of April 2025).
6. Deduct pension (employee's share — typically 5% of banded earnings).
7. Produce payslip showing all of the above + net pay.
8. Submit RTI FPS (Full Payment Submission) to HMRC on or before the pay date — this is mandatory and missing it is a penalty.
9. Pay the employee their net amount.
10. Hold PAYE + NIC due to HMRC — pay by the 22nd of the following month.
11. Hold pension contributions — pay to your pension provider (NEST etc.) by the 22nd.

The tax rates that matter (2025-26)

Total cost of an employee — the founder shock

Worked example. You hire an engineer at £50,000 gross salary.

• Gross salary: £50,000
• Employer NIC (15% of £45,000 above ST): £6,750
• Employer pension (3% on banded): ~£1,320
• Total annual cost: ~£58,070

The employee's net take-home is around £38,500 after their income tax + NIC + pension. So you're paying £58k to deliver £38k of take-home — roughly £20k goes to HMRC + pension.

RTI — Real Time Information

Every pay run must be reported to HMRC via an FPS (Full Payment Submission)on or before the pay date. This is non-negotiable; missing it triggers penalties from the first late filing. The submission contains:

• Each employee's pay, tax, NIC, pension this period
• YTD figures
• Tax code + NI number + start/leave dates

At year-end you also file a P60 for each employee + an Employer Payment Summary (EPS).

Year-end

After the final pay run of the tax year (which ends 5 April):

• Final FPS with YTD figures locked
• P60 for each employee, due by 31 May
• P11D for any benefits-in-kind, due by 6 July
• Class 1A NIC on benefits, due by 19 July

Common mistakes

• Late FPS. The single biggest penalty source. File on the day, even if you're late paying the employee.
• Wrong tax code. A new joiner without a P45 needs a starter checklist; getting it wrong creates over- or under-payment that takes months to unwind.
• Skipping pension auto-enrolment. Even one qualifying employee triggers it. Pensions Regulator fines start at £400.
• Forgetting to pay HMRC by 22nd. The PAYE + NIC sits in your bank looking deceptively spendable. It isn't yours.
• Not separating employer-NIC + employee-NIC. They're different parties in the books but founders often lump them as one.