If you've just hired your first employee, congratulations — your business is growing. But before that first payday arrives, you need to set up and run payroll correctly. That means registering with HMRC, understanding PAYE, calculating the right deductions, submitting reports on time, and enrolling your employee into a workplace pension. Miss any of these steps and you risk fines, penalties, and a very uncomfortable conversation with HMRC.

Running payroll for the first time sounds intimidating, but it follows a logical sequence. Once you understand the steps — and the deadlines attached to each one — the process becomes manageable. This guide covers everything a new UK employer needs to know, from registration through to your first pay run and beyond.

What Payroll Actually Means

Payroll is the process of calculating what your employees earn, deducting the correct amounts for income tax, National Insurance contributions, and pension contributions, paying the employee the net amount, and then reporting everything to HMRC. You do this every time you pay someone — weekly, fortnightly, or monthly.

As an employer, you are legally responsible for:

Deducting income tax through PAYE (Pay As You Earn) based on each employee's tax code
Deducting employee National Insurance contributions
Paying employer National Insurance contributions on top of the employee's salary
Deducting workplace pension contributions and paying your employer contribution
Reporting all of this to HMRC every time you run payroll, in real time
Paying the total tax and NI owed to HMRC by the 22nd of the following month (or 19th if paying by post)

This isn't optional. From the moment you pay someone for working for you, these obligations apply. Even if you only have one employee. Even if that employee is you, as a company director.

16:9 payroll blog illustration

Step 1: Register as an Employer with HMRC

Before you can run payroll, you must register as an employer with HMRC. This gives you two critical reference numbers: your employer PAYE reference and your Accounts Office reference. You'll need both to submit payroll reports and pay tax to HMRC.

When to register

You must register before your first payday. The process can take up to 30 days, so don't leave it until the last minute. You can register up to two months before you start paying staff, but no earlier. If your employee's first payday is 28 April, register no later than late March to ensure your reference numbers arrive in time.

How to register

The quickest method is online through the GOV.UK website. You'll need your business name and registered address, your contact details, the date you plan to start paying employees, and — if you're a sole trader — your National Insurance number. For limited companies, you'll need your company registration number and UTR (Unique Taxpayer Reference).

Once you submit the registration, HMRC will send a letter to your registered business address containing your employer PAYE reference and Accounts Office reference. Keep these numbers safe — you'll use them every time you submit payroll information or make a payment to HMRC.

Set up PAYE Online

After receiving your reference numbers, enrol for HMRC's PAYE Online service through your Government Gateway account. This lets you submit payroll information electronically, view your PAYE account, and check what you owe. HMRC will send an activation code by post to complete the setup.

Step 2: Choose Payroll Software

You cannot submit payroll information to HMRC on paper. Everything must be submitted electronically through Real Time Information, which means you need payroll software that can calculate pay, apply the correct deductions, and send reports directly to HMRC.

Your options

There are three broad approaches:

HMRC Basic PAYE Tools — A free software package from HMRC. It handles basic payroll for up to 9 employees, including RTI submissions. It works, but it's bare-bones — no payslip generation, limited reporting, and the interface is functional rather than user-friendly. Suitable if you have one or two employees and very simple pay arrangements.
Commercial payroll software — Cloud-based payroll platforms that handle everything from calculations and payslips to RTI submissions, pension auto-enrolment, and year-end reporting. These range from around £10 to £50 per month depending on features and employee count. They save significant time and reduce the risk of errors, especially as your team grows.
Outsource to a payroll bureau or accountant — You hand over the payroll entirely to a professional who runs it on your behalf. This costs more but eliminates the administrative burden completely. Typical costs range from £5 to £15 per employee per month.

For most new employers with a small team, commercial payroll software strikes the best balance between cost and capability. It automates the calculations you'd otherwise need to do manually, submits directly to HMRC, generates payslips, and handles pension contributions — all in one place.

Step 3: Collect Employee Information

Before you can run your first pay run, you need specific information from each employee. Without it, you cannot calculate their pay correctly or report it to HMRC.

What you need from every new starter

Full legal name
Date of birth
Home address
National Insurance number
P45 from their previous employer (if they have one)
Starter checklist (if they don't have a P45)
Bank account details for salary payments
Student loan plan type (if applicable)

How tax codes work for new employees

The tax code tells your payroll software how much tax-free income the employee is entitled to before tax kicks in. The standard tax code for 2026/27 is 1257L, which gives the employee a personal allowance of £12,570 per year.

If your new employee gives you a P45 from their previous employer, use the tax code shown on it. If they don't have a P45, they'll need to complete a starter checklist with one of three statements:

Statement A — This is their first job since last 6 April and they haven't been receiving taxable benefits. Use tax code 1257L on a cumulative basis.
Statement B — This is their only job but they've had another since 6 April. Use tax code 1257L on a Week 1/Month 1 basis.
Statement C — They have another job or pension. Use tax code BR, which taxes all earnings at the basic rate with no personal allowance.

Getting the tax code right from day one matters. A wrong tax code means your employee pays too much or too little tax, which creates problems for both of you when HMRC reconciles at year-end.

Step 4: Run Your First Pay Run

This is the part where everything comes together. A pay run is the process of calculating each employee's gross pay, applying the correct deductions, and producing the figures you'll report to HMRC.

What happens during a pay run

Your payroll software will walk you through this, but here's what's being calculated behind the scenes:

Gross pay — The employee's total pay before deductions. This includes their salary, any overtime, bonuses, or commission.
Income tax (PAYE) — Calculated based on the employee's tax code and cumulative earnings for the tax year. For a basic-rate taxpayer on 1257L, this is 20% of earnings above the personal allowance threshold.
Employee National Insurance — For the 2026/27 tax year, employees pay 8% on earnings between the primary threshold (£242 per week) and the upper earnings limit (£967 per week), and 2% on earnings above that.
Employer National Insurance — You pay 15% on earnings above the secondary threshold of £96.15 per week. This is a cost to the business on top of the employee's salary — the employee never sees this deduction because it doesn't come out of their pay.
Pension contributions — If the employee is enrolled in your workplace pension scheme, their contribution (typically 5% of qualifying earnings) is deducted from their gross pay, and you add your employer contribution (minimum 3%).
Student loan repayments — If applicable, deducted at the relevant plan rate once earnings exceed the threshold for that plan type.
Net pay — What the employee actually receives after all deductions.

Your payroll software calculates all of this automatically based on the tax codes, NI categories, and pension settings you've entered. You review the figures, confirm they're correct, and approve the pay run.

What you owe on top

Remember that the employer's National Insurance contribution is an additional cost to your business. If you pay an employee £2,500 per month gross, the amount you owe HMRC in employer NI alone is approximately £312. This is on top of the salary. Many first-time employers are caught off guard by this cost because it doesn't appear on the payslip — it's your obligation, not the employee's deduction.

Step 5: Report to HMRC

Every time you run payroll, you must submit a Full Payment Submission to HMRC. The FPS tells HMRC exactly how much you've paid each employee, how much tax you've deducted, how much NI both the employee and employer owe, and any student loan deductions. It must be submitted on or before the date you pay your employees.

Full Payment Submission (FPS)

Your payroll software generates the FPS automatically from the pay run data and submits it directly to HMRC through its built-in connection. You don't need to log into the HMRC website or fill out any forms manually. The software handles the formatting, validation, and transmission. All you need to do is confirm the submission after each pay run.

Employer Payment Summary (EPS)

If you need to claim reductions against your HMRC bill — such as statutory maternity, paternity, or sick pay reclaims, or the Employment Allowance — you submit an EPS. This is typically submitted monthly, by the 19th of the following tax month. Your payroll software will prompt you when an EPS is needed and handle the submission.

Paying HMRC

The total amount you owe HMRC each month includes all employee tax and NI deductions plus your employer NI contributions, minus any reductions like the Employment Allowance. This must be paid by the 22nd of the following month if paying electronically, or by the 19th if paying by cheque.

For example, payroll for April 2026 must be paid to HMRC by 22 May 2026. You can pay by direct debit, online banking, or through your HMRC online account. Setting up a direct debit is the simplest way to ensure you never miss a payment.

Step 6: Set Up a Workplace Pension

As an employer, you have a legal duty to provide a workplace pension scheme and automatically enrol eligible employees. This obligation begins from the day you employ your first eligible member of staff, and you have six weeks to complete the enrolment process.

Who must be enrolled

You must automatically enrol any employee who is aged between 22 and State Pension age and earns more than the earnings trigger, which remains at £10,000 per year for 2026/27. Employees who earn between the lower earnings limit and the earnings trigger can choose to opt in, and if they do, you must pay the employer contribution.

Contribution rates

The minimum total contribution is 8% of qualifying earnings, split between employer and employee:

Contribution	Minimum Rate	Paid By
Employer contribution	3%	The business
Employee contribution	5%	Deducted from employee's pay
Total minimum	8%	Combined

Qualifying earnings for 2026/27 are earnings between the lower earnings limit of £6,500 and the upper earnings limit of £50,270 per year. Contributions are calculated on the band of earnings between these two figures, not on total salary.

Choosing a pension provider

You need to select a pension provider before you can enrol employees. NEST (National Employment Savings Trust) is a government-backed option that accepts all employers regardless of size and charges no setup fees. Other providers include The People's Pension, NOW: Pensions, and Smart Pension. Your payroll software should integrate with your chosen provider so that contribution data flows automatically without manual re-entry.

Declaration of compliance

Within five months of your duties start date, you must submit a declaration of compliance to The Pensions Regulator confirming that you've met your auto-enrolment obligations. Failure to do so can result in escalating fines.

Key Rates and Thresholds for 2026/27

Keep these figures handy. They affect every pay run you process for the 2026/27 tax year, which runs from 6 April 2026 to 5 April 2027.

Rate or Threshold	Amount	Notes
Personal allowance	£12,570/year	Tax-free earnings for employees on 1257L
Basic rate tax	20%	On earnings up to £37,700 above the personal allowance
Higher rate tax	40%	On earnings from £37,701 to £125,140
Employee NI rate	8%	On earnings between £242 and £967 per week
Employer NI rate	15%	On earnings above £96.15 per week
Employment Allowance	£10,500	Annual reduction in employer NI bill
National Living Wage (21+)	£12.71/hour	From April 2026
Pension auto-enrolment trigger	£10,000/year	Employees earning above this must be enrolled

The Employment Allowance

This is a benefit many first-time employers don't know about. The Employment Allowance lets eligible employers reduce their employer National Insurance bill by up to £10,500 per year. For small businesses, this can completely eliminate your employer NI liability for the first several employees.

To claim it, you must be a business or charity with employer NI liability in the previous tax year below £100,000. You claim through your payroll software — it's declared on your Employer Payment Summary. Most commercial payroll software includes the Employment Allowance as a standard setting you switch on during setup.

The impact is significant. If your total employer NI for the year comes to £8,000, the Employment Allowance wipes it out entirely. You pay nothing. If it comes to £14,000, you pay only £3,500. For a first-time employer with a small team, this is potentially the single biggest payroll cost saving available to you.

Common First-Time Mistakes to Avoid

Registering too late. HMRC registration can take up to 30 days. If your reference numbers haven't arrived by your first payday, you can't submit your FPS on time. Register as soon as you know you'll be hiring.
Forgetting employer NI. It's the cost new employers most commonly forget to budget for. At 15% above the secondary threshold, it adds roughly £2,000 to £4,000 per year per full-time employee on an average salary, before the Employment Allowance is applied.
Not enrolling in a pension on time. You have six weeks from your duties start date. Miss it and The Pensions Regulator can issue compliance notices and escalating daily fines.
Using the wrong tax code. If a new starter doesn't give you a P45 or complete a starter checklist, you might guess the tax code. Don't guess. Use the starter checklist process — it takes two minutes and prevents months of tax code corrections later.
Paying HMRC late. Tax and NI owed to HMRC must be paid by the 22nd of the following month. Late payment triggers interest and penalties. Set up a direct debit and treat it as a non-negotiable fixed cost.
Not keeping records. You must keep payroll records for at least three years. This includes pay, deductions, tax codes, hours worked (for minimum wage compliance), and pension contributions. Your payroll software stores this automatically, but make sure you have backups.

After the First Pay Run

Once you've successfully run your first payroll, the process repeats on your chosen pay cycle — weekly, fortnightly, or monthly. Each cycle involves reviewing hours and pay, running the calculations through your software, approving the pay run, submitting the FPS to HMRC, and paying your employees.

At the end of each tax year in April, you'll also need to complete year-end tasks: submitting your final FPS, filing an EPS to confirm the year is closed, and issuing P60 certificates to each employee showing their total pay and deductions for the year. Your payroll software guides you through this process step by step.

Payroll is a recurring obligation, not a one-time setup. But once the initial registration, software choice, and pension arrangement are in place, each subsequent pay run becomes routine. The first one takes the longest. After that, it's a rhythm — and for a small team, it should take no more than 15 to 30 minutes per pay period.

This article is for informational purposes only and does not constitute legal, tax, or financial advice. For guidance specific to your circumstances, consult a qualified accountant or payroll professional.

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