Taking on your first employee is a proud milestone for any small business owner. It means your business is growing, your workload is expanding, and you need support. But with that first hire comes a new set of responsibilities — chief among them, running payroll correctly. Get it wrong, and you risk financial penalties from HMRC, unhappy staff, and tangled compliance headaches. Get it right, and it becomes a reliable, almost routine part of running your business. This guide walks you through every key step, in plain English.
Step 1: Register as an Employer with HMRC
Before you pay anyone — even a single part-time member of staff — you must register as an employer with HMRC. You need to do this at least two weeks before your first payday, so don't leave it until the last moment.
Registering is done online through HMRC's Government Gateway. Once registered, you'll receive a PAYE reference number and an Accounts Office reference number. Keep both safe — you'll need them for every submission and payment you make. If you're a sole trader taking on staff for the first time, this is also the point where your tax affairs start to split: your personal Self Assessment obligations remain separate from your employer duties.
It's also worth checking whether the person you're hiring is actually an employee or a self-employed contractor. HMRC's CEST (Check Employment Status for Tax) tool can help clarify this, and getting the classification wrong is one of the most common — and costly — mistakes small businesses make.
Step 2: Gather the Right Information From Each Employee
Before you process your first payroll, you need certain details from every new starter. This isn't just good practice — much of it is a legal requirement.
- Full name, address, and date of birth
- National Insurance number
- P45 from their previous employer (if they have one)
- Starter checklist (formerly the P46), if no P45 is available — this determines which tax code to use
- Bank account details for payment
- Contracted hours and salary or hourly rate
The tax code you assign at the start determines how much income tax is deducted each pay period. Using the wrong code — say, applying an emergency tax code when a valid P45 is available — will result in your employee being overtaxed, which creates unnecessary friction and corrective admin down the line.
Step 3: Calculate Pay, Deductions, and Statutory Payments
This is where payroll gets technical. Each pay period, you need to calculate:
- Gross pay — the total earned before any deductions, including basic salary, overtime, commission, and bonuses
- Income tax — based on the employee's tax code and HMRC's tax tables or your payroll software's calculations
- National Insurance contributions (NICs) — both the employee's contribution and your employer's contribution
- Pension deductions — if auto-enrolment applies (more on this below)
- Any statutory payments — such as Statutory Maternity Pay (SMP), Statutory Sick Pay (SSP), or Statutory Paternity Pay (SPP)
Statutory payments are often where small businesses come unstuck. SSP in 2024/25 is £116.75 per week, payable for up to 28 weeks to eligible employees. SMP, meanwhile, is paid at 90% of average weekly earnings for the first six weeks, then at the statutory rate (£184.03 per week in 2024/25) for up to 33 further weeks. These figures change each April, so always verify against the current HMRC rates.
Employers with a total NICs bill of less than £100,000 in the previous tax year can also claim the Employment Allowance, which reduces your employer NICs liability by up to £5,000 per year — a meaningful saving for small businesses.
Step 4: Submit Real Time Information (RTI) to HMRC
Under RTI, you must report payroll information to HMRC on or before every payday — not at the end of the month or quarter. This is done via a Full Payment Submission (FPS), which tells HMRC exactly what you've paid each employee and what deductions you've made.
If you haven't paid anyone in a particular pay period, you'll need to submit an Employer Payment Summary (EPS) instead, to confirm that no payments were made. Failing to submit either on time triggers automatic late-filing penalties, starting at £100 per month for employers with one to nine employees.
This is one area where using dedicated payroll software pays for itself almost immediately. Platforms like BizHub365 handle RTI submissions directly through HMRC's API, so your FPS is filed automatically as part of your payroll run — no bridging software, no manual uploads, and no missed deadlines.
You also need to pay HMRC the income tax and NICs you've collected, typically by the 22nd of the following month (or 19th if paying by post). Set a calendar reminder — HMRC charges interest on late payments.
Step 5: Manage Auto-Enrolment and Pension Obligations
Since the rollout of auto-enrolment, virtually every UK employer — including those with just one eligible worker — has a legal duty to enrol qualifying employees into a workplace pension scheme. A worker is eligible for auto-enrolment if they are:
- Aged between 22 and State Pension age
- Earning more than £10,000 per year (£833 per month / £192 per week)
- Working in the UK
Minimum contribution levels in 2024/25 are 3% from the employer and 5% from the employee (including tax relief), calculated on qualifying earnings. You'll need to choose a compliant pension provider — NEST is a government-backed option that accepts all employers — and keep records of enrolment, opt-outs, and re-enrolment cycles.
The Pensions Regulator (TPR) takes non-compliance seriously. Fixed penalty notices start at £400, and escalating daily penalties apply for continued breaches. If you're using BizHub365 for payroll, auto-enrolment support is built in, so contribution calculations are handled alongside your regular pay run rather than managed as a separate, error-prone process.
Step 6: Handle Year-End Payroll Tasks
At the end of each tax year (5 April), there's a set of housekeeping tasks every employer must complete:
- Submit your final FPS or EPS for the tax year, marked as the last submission
- Issue P60s to all employees still in your employ by 31 May
- Issue a P45 to any employee who leaves during the year
- Report any employee expenses or benefits in kind on a P11D by 6 July (unless you've agreed a PAYE Settlement Agreement with HMRC)
The new tax year also brings updated tax codes, NIC thresholds, and statutory payment rates — all of which need to be applied from the first pay run in April. Good payroll software will update these automatically, but it's worth reviewing them manually to catch anything unusual, particularly if an employee's circumstances have changed.
Bringing It All Together
Running payroll correctly as a UK small business is not optional — it's a legal obligation with real financial consequences if handled poorly. But it is absolutely manageable, especially with the right processes and tools in place. Start by registering promptly, collect the right information from day one, keep meticulous records, and never miss an RTI deadline.
Whether you're managing payroll manually, using a standalone tool, or relying on an all-in-one platform like BizHub365 that handles everything from FPS submissions to pension deductions and P60 generation, the goal is the same: pay your people accurately and on time, keep HMRC informed, and stay on the right side of your compliance obligations. Do that consistently, and payroll stops being a source of stress and becomes simply another well-run part of your business.