Your first employee’s start date is confirmed. Before they can be paid, you need a working payroll system in place, and HMRC expects you to have registered as an employer, often weeks before that first payday even arrives.
Setting up payroll for the first time involves more than picking software. You’ll register with HMRC, collect the right details from your new employee, work out tax codes and National Insurance, and report everything through Real Time Information (RTI) on or before payday itself.
Getting this right from day one avoids emergency tax codes, late filing penalties, and the kind of payroll corrections that take hours to unpick later. This guide walks through each step in the order you’ll actually need to complete them, from registration through to your first live pay run.
Register as an Employer with HMRC
(For Illustrative Purposes Only)
You must register as an employer with HMRC before your first payday, and this can take up to five working days, so don’t leave it until the last minute. Registration gives you a PAYE reference number and a login for PAYE Online, both of which you’ll need before you can report any pay.
You register online through HMRC’s website, and you should do this as soon as you know your start date, not after your new employee has already begun work. HMRC recommends registering no earlier than two months before you first pay someone, but you do need it done before that first payslip goes out.
Once registered, you’ll get an Accounts Office reference and an Employer PAYE reference. Keep both somewhere safe. You’ll quote them every time you report payroll or pay HMRC.
Run Payroll Yourself or Outsource It
Registration itself is a task only you, as the employer, can complete. HMRC will not accept an agent registering on your behalf without proper authorisation set up first.
Once registered, you can choose to run payroll yourself using software or hand the ongoing work to a bookkeeper, accountant or payroll bureau. Outsourcing does not remove your legal responsibility as the employer; you’re still accountable for accuracy and deadlines, even if someone else presses the buttons.
Choose a Payroll System
Your payroll system needs to calculate pay, deductions and tax, then report to HMRC through RTI. Most small businesses use dedicated software rather than manual spreadsheets, since software builds in current tax rates and reduces the risk of errors.
Software vs Outsourcing
Payroll software typically costs between £30 and £80 a month, with pricing depending on how many employees you have, according to a guide to payroll processing for UK businesses. Software works well if you have a small, stable team with predictable hours and you’re comfortable learning a new system.
Outsourcing to an accountant or payroll bureau makes more sense once your situation gets complicated. If you’re dealing with variable hours, regular overtime, commission payments, or you’re hiring several people in quick succession, professional support reduces the chance of costly mistakes.
| Software (in-house) | Outsourced payroll | |
|---|---|---|
| Typical cost | £30 to £80 per month | Varies by provider, often per payslip |
| Who does the work | You or a staff member | Bookkeeper or payroll bureau |
| Best suited to | Simple, stable pay | Variable hours, overtime, fast growth |
| Legal responsibility | Stays with you | Stays with you |
| RTI submissions | You submit | Provider submits on your behalf |
Whichever route you choose, check the software or provider is recognised by HMRC for RTI reporting before you commit.
Set Up a PAYE Scheme
(For Illustrative Purposes Only)
Your PAYE scheme is the mechanism through which you report pay and deduct tax and National Insurance on behalf of your employees. It’s set up automatically when you register as an employer with HMRC, so this step runs alongside registration rather than as a separate task.
Once your scheme is active, you’ll use your Employer PAYE reference on every submission you make, whether that’s a Full Payment Submission or an Employer Payment Summary. Your payroll software or provider will usually ask for this reference when you first set up your employee records.
Information to Get From Each Employee
Before running your first payroll, collect a set of details from each employee. Missing information here is one of the most common causes of tax errors in a first pay run.
You’ll need:
- Full name, address and date of birth
- National Insurance number
- Tax code, taken from a P45 if they have one, or a completed starter checklist if not
- Bank details for payment
- Student loan or postgraduate loan status, if applicable
Accurate starter information avoids emergency tax codes and cuts down on corrections later, as highlighted in this practical guide to UK payroll for small businesses. If an employee has no P45, they must complete a Starter Checklist (the HMRC form that replaced the old P46). This lets you assign a provisional tax code until HMRC confirms the correct one
Understand Tax Codes and National Insurance
(For Illustrative Purposes Only)
A tax code tells you how much tax-free pay an employee gets before deductions apply, and getting it right from day one prevents both underpayment and overpayment of tax. Most employees have a standard code, but new starters without a P45 may need an emergency code until HMRC issues the correct one.
National Insurance works alongside tax but follows its own rules. Employees pay National Insurance once their earnings pass a set threshold, and you as the employer pay a separate employer’s contribution on top of their wages.
Your payroll software calculates both automatically once you’ve entered the employee’s tax code and gross pay, but it’s worth understanding the basics yourself. If HMRC later queries a tax code or contribution, you’re the one who needs to explain the figures.
Tax codes change at the start of each tax year on 6 April, and HMRC will notify you of any updates for existing employees. Check codes at the start of each tax year rather than assuming last year’s figures still apply.
Process Your First Payroll
(For Illustrative Purposes Only)
Your first payroll run needs to happen on or before your employee’s agreed payday, not after it. This is a legal requirement under RTI, and missing it, even by a day, counts as late reporting to HMRC.
Before processing pay, confirm your pay frequency (weekly, fortnightly or monthly) and the exact payday you’ve agreed with your employee. This should already be set out in their employment contract.
Calculating Pay and Deductions
Gross pay is the starting point, calculated from hours worked, a fixed salary, or a mix of both if commission or overtime applies. From there, your software works out tax, National Insurance and any other deductions such as student loan repayments or pension contributions.
A simple example: an employee earning £2,000 gross a month with a standard tax code will have income tax and employee National Insurance deducted, leaving their take-home pay. Your business also owes employer National Insurance on top, which comes out of your business account, not the employee’s pay.
You have a legal duty under The Pensions Regulator to assess all staff for workplace pension auto-enrolment from their very first day. If an employee is aged between 22 and State Pension age and earns over £10,000 a year, you must automatically enrol them into a qualifying scheme. Even if they earn below this threshold, you are still legally required to write to them explaining their right to opt in or join a pension scheme.
Don’t forget the employer duties that sit outside payroll itself: right-to-work checks, a signed employment contract, and employer’s liability insurance should all be sorted before your employee’s first day, not after their first payslip.
Report Your Payroll to HMRC
(For Illustrative Purposes Only)
You must report pay and deductions to HMRC on or before every payday, using your payroll software’s built-in RTI function. This isn’t an annual or monthly summary; it happens every single time you pay someone.
Full Payment Submission (FPS)
A Full Payment Submission (FPS) tells HMRC what you’ve paid each employee and what you’ve deducted, and it must be sent on or before payday itself. Your software generates this automatically once you’ve finalised the pay run, so the process usually takes a few clicks rather than manual form-filling.
If you’re consistently late with FPS submissions, HMRC can issue penalties, so treat the submission as part of the pay run itself rather than an afterthought. Some circumstances allow for reporting after payday, such as when you pay employees in cash and physically can’t process the FPS in advance, but these exceptions are limited and should not become routine.
If you make a mistake on an FPS, correct it in your next regular submission rather than waiting until the end of the tax year.
Pay Your Employees and HMRC
(For Illustrative Purposes Only)
You need to pay your employee their net wages on the agreed payday and separately pay HMRC the tax and National Insurance you owe, usually by the 22nd of the following month. These are two distinct payments, and mixing up the timing of either one creates cash flow and compliance problems.
Methods and Deadlines
Most small businesses pay employees by direct bank transfer (BACS or Faster Payments) rather than cash or cheque, since it creates a clear payment record and matches what payroll software expects. Set up a standing process for this on the same date each pay period, so it doesn’t rely on you remembering manually.
HMRC payments follow a separate deadline. If you pay electronically, tax and National Insurance are due by the 22nd of the month following the tax month you’re reporting for; postal payments are due by the 19th. Small employers whose average monthly PAYE bill is under £1,500 can arrange to pay quarterly instead of monthly, which helps smooth cash flow for very small teams.
Set a recurring reminder for both deadlines. Late payment to HMRC, even by a few days, can trigger interest charges, and persistent lateness escalates to penalties.
Conclusion
Setting up payroll for the first time comes down to a clear sequence: register as an employer, choose a system that suits your team, collect accurate employee details, and report every pay run through RTI on or before payday. Miss any one of these steps and the knock-on effects, from emergency tax codes to late filing penalties, tend to surface quickly.
Staying compliant isn’t a one-off task completed at setup. Tax codes change each April, pension duties apply from an employee’s first day, and every payday brings a fresh reporting deadline. Building these checks into your routine from the start, whether you run payroll yourself or hand it to a provider, keeps your business on the right side of HMRC and your employees paid correctly and on time.