Taking on your first member of staff is a significant moment for any small business. It means the work is there, the confidence is there, and the business is moving into a new phase. It also means payroll – and for many business owners, that is the part that feels most unfamiliar.
Payroll is not complicated once you understand what it involves. But it does have rules, deadlines, and obligations that need to be in place before the first payment is made – not set up afterwards. This article covers the essentials: what you need to do, what you need to know, and where the common mistakes tend to happen.
Register as an Employer With Plenty of Time Before the First Payday
The first step is registering as an employer with HMRC. This needs to happen before you pay anyone for the first time – you cannot do it retrospectively once a payment has been made.
Registration is done online through HMRC’s website and takes a few weeks to process. Once registered, you will receive a PAYE reference number and an Accounts Office reference, both of which you will need to set up payroll and make payments to HMRC. It is worth starting the registration process as soon as you know you are taking someone on, rather than leaving it until the week before their start date.
If you are taking on your first employee and are not sure where to start, get in touch with the team at Atria before the start date. Getting the registration and setup right from the outset is considerably easier than correcting problems after the first payroll has run.
Understand What PAYE Involves
PAYE – Pay As You Earn – is the system HMRC uses to collect income tax and National Insurance from employees’ wages. As an employer, you are responsible for calculating the correct deductions, taking them from the employee’s pay before it is paid, and remitting the money to HMRC on their behalf.
Your PAYE reference is also known as Employer’s reference, and is different from UTR and Accounts Office reference.
That means every pay run involves three calculations for each employee: the gross pay they have earned, the income tax deducted based on their tax code, and the National Insurance deducted based on their earnings. The employer also pays a separate employer’s National Insurance contribution on top – this is a cost to the business, not a deduction from the employee’s pay, and it is one that new employers sometimes overlook when budgeting for the cost of a hire.
Tax codes matter here. Each employee has a tax code that determines how much of their income is tax-free before deductions begin. New starters should provide a P45 from their previous employer, which carries their tax code across. If they do not have one, HMRC provides a starter checklist that determines which emergency code to apply in the meantime. Using the wrong tax code – even inadvertently – means the wrong amount of tax is deducted, which creates a correction to manage either in-year or at year-end.
Pay at Least the National Minimum Wage
Every worker is entitled to be paid at least the National Minimum Wage, or the National Living Wage if they are aged 21 or over. The rates are set by the government and updated each April. For the current tax year (2026-27), the National Living Wage is £12.71 per hour for workers aged 21 and above. Lower rates apply for younger workers and apprentices.
The rates apply to all workers, not just employees – so if you engage casual workers, zero-hours workers, or people you might think of as self-employed but who are actually workers in the legal sense, the obligation still applies. Getting this wrong is one of the most common payroll compliance issues, and with the Fair Work Agency now actively enforcing minimum wage legislation, it is not an area to be relaxed about.
It is also worth noting that the effective hourly rate needs to take account of all hours worked, not just contracted hours. If an employee regularly works beyond their contracted hours without additional pay, or if there are unpaid activities – mandatory training, travel between sites, pre-shift preparation – that count as working time, the effective rate may be lower than it appears on paper.
Submit Your Payroll to HMRC on Time
Every time you pay your employees, you must submit a Full Payment Submission – known as an FPS – to HMRC. This submission tells HMRC what each employee was paid and what deductions were made. It must be submitted on or before the date of payment, not after. Late submissions can result in penalties, and HMRC’s systems are set up to flag them automatically.
If there is a month where you have no employees to pay – because someone has left, or because you have a worker on unpaid leave – you may need to submit an Employer Payment Summary instead, to tell HMRC that no payments were made. Failing to submit anything in a month where HMRC expects a return can trigger estimated charges that then need to be corrected.
The payment of the tax and National Insurance collected is made separately, to HMRC’s Accounts Office. For most small employers, this is due by the 19th of the month following the pay period – or the 22nd if paying electronically. Missing these payment dates results in interest and, eventually, penalties.
Enrol Eligible Workers into a Pension
Auto-enrolment is the legal requirement to enrol eligible workers into a qualifying workplace pension scheme and make contributions on their behalf. It applies from the worker’s first day of employment – there is no waiting period for new employers, and the duties begin immediately.
A worker is eligible for auto-enrolment if they are aged between 22 and state pension age and earn above the earnings trigger, which is currently £10,000 per year. Workers who earn less, or who fall outside the age range, may still have the right to opt in and receive employer contributions, so it is worth understanding the different categories rather than assuming the obligation only applies to full-time employees on a standard salary.
The minimum contribution rates are 8% of qualifying earnings in total – at least 3% from the employer, with the remainder from the employee. You will need to choose a pension provider before enrolment begins. There are a number of providers set up specifically for small employers, and your payroll software will typically handle the enrolment and contribution calculations once the scheme is connected.
Employees have the right to opt out within one month of being enrolled, in which case any contributions deducted must be refunded. They cannot be encouraged or pressured to do so – that is a specific legal prohibition, and breaching it carries significant penalties.
Issue Payslips and Keep Records
Every worker – not just employees – is legally entitled to a payslip on or before the date they are paid. The payslip must show gross pay, all deductions, and net pay. For workers whose pay varies by hours worked, the number of hours must also be shown.
Beyond payslips, you are required to keep payroll records for a minimum of three years after the end of the tax year they relate to. Those records need to include what each employee was paid, what deductions were made, any expenses or benefits provided, and any statutory payments made. HMRC can inspect these records, and being unable to produce them is a problem in its own right, separate from any underlying compliance issues the records might reveal.
Good record-keeping also makes your own life easier. When an employee queries their pay – and at some point, someone will – being able to find the relevant payslip and the calculation behind it quickly is considerably better than having to reconstruct it from memory.
Know Your Statutory Payment Obligations
As an employer, you are responsible for administering a range of statutory payments when employees are absent or on leave. The main ones a small business is likely to encounter are:
- Statutory Sick Pay (SSP) – payable from the first day of absence following the removal of the three-day waiting period in April 2026. The current weekly rate is £123.25, payable for up to 28 weeks.
- Statutory Maternity Pay (SMP) – payable for up to 39 weeks for eligible employees, at 90% of average weekly earnings for the first six weeks and the statutory rate thereafter.
- Statutory Paternity Pay (SPP) and Statutory Shared Parental Pay (ShPP) – covering paternity leave and the option for parents to share leave and pay between them.
- Statutory Adoption Pay (SAP) – for employees adopting a child, with similar rules to maternity pay.
Each of these has its own qualifying conditions, notice requirements, and rates. As a small employer, you can recover a proportion of the statutory payments you make from HMRC – the recovery rates and processes vary by payment type. Your payroll software should handle the calculations, but it is worth understanding the entitlements so that you can manage the conversations with employees correctly when the situations arise.
Consider Whether to Manage Payroll Yourself or Outsource It
For a very small business with one or two employees on straightforward pay arrangements, running payroll in-house using software is manageable. The main platforms – including BrightPay, which we use at Atria – are designed to handle the calculations, submissions, and record-keeping automatically, and the learning curve is less steep than most people expect.
As the business grows, or as pay arrangements become more complex – variable hours, multiple pay frequencies, benefits, salary sacrifice, different worker types – the time and attention required to manage payroll correctly increases. At that point, the case for outsourcing to a payroll provider tends to become straightforward. The cost is modest relative to the risk of getting things wrong, and it frees up the business owner to focus on things that only they can do.
The decision is not permanent. Many businesses start by managing payroll themselves and transition to outsourcing as they grow. What matters is that whichever approach is in place is working correctly – and that it keeps pace with the obligations as they evolve, rather than running on autopilot while the rules change around it.
At Atria, we manage payroll for businesses at every stage – from first-time employers setting things up for the first time to established businesses looking for a more reliable and hands-off solution. If you would like to talk through what is involved, or whether outsourcing your payroll might be the right move, get in touch with the team.
This article reflects payroll legislation and HMRC requirements as at June 2026, including SSP changes effective from April 2026 and NLW rates effective from April 2026. Rates and rules are subject to change. This article does not constitute legal or financial advice. For guidance specific to your circumstances, please speak to a qualified professional.
