Hiring Your First Employee UK: Payroll, Pension & Tax 2026/27

A lot of the questions we hear from directors aren't about paying themselves anymore. They're about paying someone else. The moment you move from a one-person company to an employer, a whole new set of obligations switches on at once: PAYE, minimum wage law, workplace pensions, and a National Insurance relief that most new employers assume they'll automatically get and then find out they don't.

None of it is complicated individually. It's the number of things that land in the same few weeks that trips people up.

Registering as an employer comes before the first payday

You need to register with HMRC as an employer before your new hire's first payday, and HMRC recommends doing it at least two weeks before that date because registration can take up to two weeks to process (longer if you're registering close to the start of a new tax year). Registration gives you a PAYE reference and an Accounts Office reference, both of which you'll need to run payroll and to pay HMRC what you deduct each month.

You can't register more than two months before you actually start paying someone, so this isn't something to do speculatively months in advance. If you've made a job offer with a start date, that's your trigger to register.

Once registered, you (or your bookkeeper, or a payroll service) report pay and deductions to HMRC on or before every payday through Real Time Information, commonly just called RTI. Missing or late RTI submissions is one of the more common ways small employers end up with a penalty in their first year, simply because nobody told them it has to happen every single payday, not monthly or quarterly.

What you actually have to pay them

The National Minimum Wage and National Living Wage rates rise every April, and the current rates (from April 2026) are:

£12.71 an hour for workers aged 21 and over (the National Living Wage)
£10.85 an hour for workers aged 18 to 20
£8.00 an hour for workers under 18
£8.00 an hour for apprentices under 19, or apprentices 19 or over who are in the first year of their apprenticeship

Paying below these rates, even by mistake, is a legal breach with real consequences: HMRC actively investigates underpayment and can name employers publicly, on top of requiring back pay. A common trap for small employers is getting this wrong on gaps that aren't obvious from a basic hourly calculation, like unpaid trial shifts that should have been paid, or deducting the cost of a uniform in a way that pushes effective hourly pay below the threshold.

On top of gross pay, the company pays employer's Class 1 National Insurance on what it pays each employee above the secondary threshold, which is £5,000 a year for 2026/27. The rate is 15%. So an employee earning £30,000 a year generates employer NI of roughly 15% of £25,000, around £3,750, on top of their salary. That's before any pension contribution. It's a cost directors sometimes forget to budget for when they're working out whether a hire is affordable, because it's easy to think only in terms of the headline salary.

Employment Allowance: the relief most one-person companies can't actually use

This is the part that catches out directors who've read a headline figure without checking the detail that applies to them specifically.

Employment Allowance lets eligible employers reduce their employer Class 1 NI bill by up to £10,500 a year. For a business taking on its first proper employee, that can wipe out most or all of the employer NI on a modest salary, which is exactly why it gets mentioned so often as a reason hiring is more affordable than people assume.

Here's the catch. If your limited company's only employee is also a director, and no one else is paid above the £5,000 secondary threshold, the company is specifically excluded from claiming Employment Allowance at all. This rule exists because the relief was designed for businesses employing staff, not for a director simply paying themselves a salary through their own company. It's a common and expensive misunderstanding: a sole director who's read that Employment Allowance is worth £10,500 and assumed it applies to their own PAYE salary, when it doesn't.

The good news is that the exclusion lifts the moment you take on a genuine second employee paid above that £5,000 threshold, even part-time. From that point, assuming you also meet the other general conditions (your company isn't doing more than half its work in the public sector, and you're not a connected company that's already claiming the allowance through a group company), you can claim. If you're a single director today but hiring is the next step, this is worth knowing before you run your first payroll with a new starter on it, because the allowance needs to be claimed through your payroll software, not applied automatically or backdated without a correction.

Workplace pensions: the auto-enrolment clock starts on day one

As soon as someone starts working for you, you have duties under automatic enrolment law, whether they're full-time, part-time, or on a short contract. You don't get to wait and see how the role works out first.

Not everyone has to be enrolled automatically. The earnings trigger for 2026/27 is £10,000 a year. An employee earning above that, aged between 22 and State Pension age, has to be automatically enrolled into a qualifying workplace pension within six weeks of their start date. Employees earning less, or outside that age band, have the right to opt in if they ask, but you don't have to enrol them yourself.

Contributions are based on qualifying earnings, the band between £6,240 and £50,270 for 2026/27, not their full salary. The legal minimum is a combined 8% of qualifying earnings, with at least 3% coming from the employer and the rest from the employee (usually 5%, though an employer can choose to cover more).

Two things routinely go wrong here for first-time employers. The first is missing the six-week deadline because nobody diarised it against the actual start date, not the date the contract was signed. The second is forgetting the declaration of compliance you have to submit to the Pensions Regulator confirming you've met your duties, which has its own separate deadline and a genuine history of fines for employers who assumed payroll software handled it automatically. Most payroll software will handle the mechanics of enrolling someone and calculating contributions, but the declaration of compliance is still something you have to actively do.

Getting the sequencing right

If you're about to take on your first employee, the order that avoids most of the common mistakes looks roughly like this: register as an employer with enough lead time before the first payday, confirm the correct minimum wage rate for their age and check it against their actual hours (not just their contracted hours, if those differ), set up PAYE reporting through payroll software that also handles auto-enrolment, and work out from day one whether Employment Allowance will actually apply to your company or not, so you're not budgeting on a saving you're not entitled to.

None of these steps are difficult alone. Where directors get caught out is treating them as a single administrative task that happens once, rather than a set of ongoing obligations: PAYE reporting every payday, pension contributions every pay run, and minimum wage compliance that has to hold up even as hours or duties change.

How Founders Ledger helps

Taking on an employee changes what your bookkeeping needs to track: gross pay, employer NI, pension contributions, and whether a relief like Employment Allowance is actually being applied correctly, all need to flow through cleanly alongside the rest of your company's finances rather than sitting in a separate payroll system nobody reconciles against the accounts. Founders Ledger keeps your live bookkeeping and tax estimates up to date as these costs land, so your corporation tax position reflects the real cost of your team as you grow, not a guess made at year-end.

You can see how it fits into the rest of your company's admin at foundersledger.co.uk.

This article is correct at the time of writing (October 2026) and is provided for general information only. It isn't financial, tax, or employment law advice. Minimum wage rates, National Insurance thresholds, and auto-enrolment figures are set by HMRC, the Low Pay Commission and the Pensions Regulator and change regularly. Speak to a qualified accountant or payroll adviser before registering as an employer or setting up payroll for the first time.