How to Set Up PAYE and Payroll for Your First Employee

Hiring your first employee is a sign your business is growing. It also makes you an employer, which means running PAYE: deducting Income Tax and National Insurance from your employees' pay, reporting it to HMRC and paying it over on time. If you're a limited company director paying yourself a salary, the same rules apply to you. Here's what's involved in setting up PAYE and payroll for businesses in Bristol and across the UK.

Before your first employee starts

• Check they have the right to work in the UK, and keep a record of the check
• Take out Employers' Liability insurance, which most employers are legally required to have
• Give them a written statement of their terms of employment from their first day
• Work out whether they need to be automatically enrolled into a workplace pension
• Decide how you'll run payroll: with HMRC-recognised payroll software, or through an accountant

If you're hiring someone from overseas who needs a visa to work for you, you'll also need a sponsor licence before they start.

Register as an employer with HMRC

You must register as an employer with HMRC before your first payday, but you can't register more than two months before you start paying people. Once you've registered, HMRC sends your employer PAYE reference by letter, so allow time for it to arrive. You'll need it to set up your payroll and to make payments to HMRC.

Running payroll each payday

Each time you pay your staff, your payroll software or accountant will:

• Calculate Income Tax, National Insurance, pension contributions and any student loan deductions
• Produce a payslip for each employee
• Send a Full Payment Submission (FPS) to HMRC on or before payday, reporting what you've paid and deducted
• Pay contributions into the workplace pension scheme

Paying HMRC

You pay HMRC the tax and National Insurance you've deducted, plus your employer National Insurance, by the 22nd of the next tax month if you pay electronically, or the 19th if you pay by post. Employers with a small monthly bill may be able to pay quarterly instead. If you're claiming the Employment Allowance or recovering statutory pay, you tell HMRC through an Employer Payment Summary (EPS).

The 2026/27 payroll rates you need to know

• Personal Allowance: £12,570 a year (£1,048 a month)
• Employee National Insurance: 8% on earnings between £12,570 and £50,270 a year, and 2% above that
• Employer National Insurance: 15% on earnings above £5,000 a year (£417 a month)
• Employment Allowance: up to £10,500 off your employer National Insurance bill, if you're eligible
• National Living Wage (aged 21 and over): £12.71 an hour from 1 April 2026
• National Minimum Wage: £10.85 an hour for ages 18 to 20, and £8 for under-18s and apprentices

For what these figures mean for your total employment costs, see our guide to the cost of employing staff in 2026.

Workplace pensions and auto-enrolment

Your pension duties start from the day your first employee starts work. You must automatically enrol staff who are aged between 22 and State Pension age, earn at least £10,000 a year and normally work in the UK, and pay employer contributions for them. The minimum total contribution is 8% of qualifying earnings, of which at least 3% must come from you as the employer. Staff outside those criteria can still ask to join. Once your scheme is set up, you must declare your compliance to The Pensions Regulator.

Year-end payroll tasks

• Send your final Full Payment Submission for the tax year
• Give every employee still working for you a P60 by 31 May
• Report expenses and benefits on form P11D by 6 July, unless you payroll them

Should you outsource payroll?

Payroll is unforgiving. Submissions have strict deadlines, rates change every April, and mistakes affect your team's pay. That's why many small employers outsource payroll from the start, especially while they only have a few employees and payroll software would be one more system to learn.

Payroll services in Bristol and across the UK

We run fully managed payroll for employers across Bristol and the UK: PAYE and National Insurance calculations, RTI submissions to HMRC, payslips, starters and leavers, workplace pensions and year-end reporting, so you can focus on your new team. Our limited company plan includes payroll for up to 5 employees. Find out more about our payroll services, or get in touch.