First Employee Payroll Checklist for UK Startups: Register PAYE, Auto-enrol, Avoid Penalties

First Employee Payroll: A UK Startup Checklist

Hiring your first employee is a major milestone, but it also introduces critical administrative duties. For UK startup founders, learning how to set up payroll for the first employee can feel daunting. You are suddenly responsible for correct tax deductions, National Insurance, and pensions, all while facing HMRC's automatic penalties for errors. This checklist provides a clear, chronological process for setting up PAYE for startups and achieving full payroll compliance from day one.

Step 1: Complete Legal and Administrative Pre-Hire Checks

Before you run payroll, several foundational legal and administrative tasks must be completed. These actions are essential for your compliance as an employer and must be handled before your new hire’s first day. First, you must issue a formal employment contract that details their role, salary, and employment terms.

Next, you must verify their legal eligibility to work in the UK. This is a crucial step in hiring your first employee, and failure to comply carries significant penalties.

A Right to Work check is a mandatory legal requirement and must be completed before the employee's employment begins.

You must also secure the right insurance. According to the Health and Safety Executive (HSE), all employers need coverage as soon as they hire staff.

Employer's Liability Insurance must be in place as soon as a business becomes an employer. The minimum coverage for Employer's Liability Insurance is £5 million.

Finally, gather the employee's tax information. Ask for their P45 from their previous job to ensure you use the correct tax code. HMRC guidance is clear on what to do if they do not have one.

If an employee does not have a P45, they must fill out a 'starter checklist' (formerly known as a P46).

You must also confirm that the agreed salary meets UK wage laws. As an employer, you are legally required to ensure that "Employee salaries must meet or exceed the National Minimum Wage or National Living Wage."

Step 2: Register as an Employer with HMRC

Once pre-hire checks are complete, you must formally register your business as an employer with the government. This involves setting up a Pay As You Earn (PAYE) scheme, which is the system HMRC uses to collect Income Tax and National Insurance. This is not an optional step and is central to all UK payroll requirements for new businesses.

The key is timing. HMRC states that "Businesses must register as an employer with HMRC before the first payday." However, you should not leave this to the last minute, as the process is not instantaneous. According to GOV.UK, "Online registration as an employer with HMRC can take up to 15 working days."

A scenario we repeatedly see is founders underestimating this timeline, leading to a scramble before the first salary payment is due. The best practice is to initiate this process as soon as you have a signed employment contract.

Upon successful registration, you will receive two essential pieces of information from HMRC.

Upon successful registration, HMRC provides an Employer PAYE reference and an Accounts Office reference.

These references are required to configure your payroll software and make payments to HMRC. Registration also enables you to file payroll data using Real Time Information (RTI), the system for reporting payments and deductions to HMRC each time you run payroll.

Step 3: Choose a Tool for Managing Payroll and Payslips

With your HMRC registration in progress, the next decision is how you will manage payroll calculations and issue compliant employee payslips. For a founder handling this directly, spreadsheets are not a viable or compliant option. The choice typically comes down to dedicated payroll software or outsourcing to an accountant.

Using payroll software for small UK companies is often the default choice for tech and e-commerce startups. Platforms like Xero Payroll, Pento, or BrightPay integrate with your accounting system, automate PAYE and National Insurance calculations, generate payslips, and handle RTI submissions. The primary benefits are lower cost and direct control, but the responsibility for accurate data entry and meeting deadlines rests with you.

Alternatively, you can outsource the function to an accountant or a specialised payroll bureau. This approach offers complete peace of mind, as experts handle all calculations, filings, and compliance. It saves significant founder time but comes at a higher cost.

The reality for most pre-seed to Series B startups is more pragmatic: dedicated payroll software usually provides the right balance of cost, control, and features. It directly solves the pain point of calculating deductions accurately without requiring prior expertise.

Step 4: Set Up a Workplace Pension Under Auto-Enrolment Rules

Beyond salary and taxes, UK law mandates that employers provide a workplace pension for their staff through a system called auto-enrolment. This is a critical component of payroll compliance for startups. As stated by The Pensions Regulator, "Employers have a legal duty to set up a workplace pension for eligible staff under auto-enrolment rules."

First, choose a pension provider (such as Nest, The People's Pension, or Smart Pension) and set up a scheme. Once your employee starts, you must assess if they are an 'eligible jobholder' based on their age and earnings, enrol them if they qualify, and provide them with formal notification. The timeline is strict.

Employers have a 6-week window from the employee's start date to provide them with written communication about the pension scheme.

Contributions are a shared responsibility between you and your employee. The Pensions Regulator confirms the minimum contribution levels.

As of the 2023/24 tax year, the minimum total pension contribution is 8% of qualifying earnings, with the employer contributing at least 3%.

The remaining 5% is contributed by the employee. This calculation is not based on their total salary. It applies to 'qualifying earnings', which for the 2023/24 tax year is the band of earnings between £6,240 and £50,270 per year.

For example, consider an employee earning £40,000 annually. Their qualifying earnings would be £40,000 minus £6,240, which equals £33,760. Your minimum 3% employer contribution would be calculated on this amount (£1,012.80 per year), not the full £40,000 salary.

Checklist Summary: Avoiding Common First-Time Payroll Errors

Hiring your first team member transforms your startup's operational requirements. Setting up payroll correctly from the start prevents future liabilities and establishes a foundation of good financial governance. The process is chronological and should not be rushed.

Remember the critical path: complete legal pre-hire checks, register with HMRC well in advance of the first payday, select a robust payroll tool, and immediately address your auto-enrolment pension duties. The two most common pitfalls for founders are underestimating the 15 working days for HMRC registration and missing the 6-week window for pension communications.

See the Payroll overview for broader compliance context. While the initial setup involves several distinct steps, modern payroll software automates most of the recurring monthly work. Investing the time to get these foundations right ensures your focus can remain on building the business, confident that your payroll is compliant, accurate, and reliable.

Frequently Asked Questions

Q: What happens if I register as an employer with HMRC too late?
A: If you register after your first payday, you may face penalties from HMRC. Late registration can also delay your ability to issue payslips and make correct payments, causing issues for your employee. It is crucial to begin the registration process at least 15 working days before the payment date.

Q: Can I run payroll for my first employee using a spreadsheet?
A: While technically possible, using spreadsheets is not recommended. They are prone to errors in calculating tax and National Insurance, do not generate compliant employee payslips, and cannot handle Real Time Information (RTI) submissions to HMRC. Dedicated payroll software is a safer, more efficient option for startups.

Q: Do I need to set up a pension for a part-time employee?
A: Yes, auto-enrolment duties apply to all staff, including part-time employees, who are 'eligible jobholders'. Eligibility is based on age (between 22 and the State Pension age) and earnings (over £10,000 per year). You must assess every employee against these criteria when they join.