Hiring Your First Employee: A Payroll Checklist for UK Small Businesses

Hiring your first employee can give you the capacity to serve more customers and spend less time doing everything yourself. It also introduces a new responsibility: paying someone accurately and on time.

Payroll involves more than transferring wages. You need the right employee information, a way to calculate deductions and a clear routine for reporting and payments. Getting those foundations in place before the first payday can prevent a small administrative mistake from becoming a recurring problem.

This checklist takes you through the main payroll steps, from budgeting for the role to reviewing your first pay run.

1. Budget for the Full Cost of Employment

An employee’s agreed salary is only part of the cost of hiring. Your budget should also allow for employer National Insurance where applicable, employer pension contributions, payroll administration, equipment and insurance.

Consider how paid leave and absences will affect capacity and whether you might need temporary cover. Include these costs in your cash flow forecast rather than relying on a strong sales month to fund the appointment.

Keep employer costs separate from deductions taken from the employee’s gross pay. This makes it easier to understand both the employee’s take-home pay and the business’s total monthly commitment.

Checklist action: Prepare a monthly employment budget and check that the business can support it during quieter periods.

2. Confirm the Pay Arrangements Before Work Starts

Agree the salary or hourly rate, normal working hours, pay frequency and payday. Decide how you will approve overtime, record absences and reimburse expenses.

Check that the pay arrangements meet the applicable National Minimum Wage or National Living Wage requirements. The calculation can be affected by working time and certain job-related costs, so an hourly rate on paper does not always tell the whole story.

Payroll setup also sits alongside wider hiring duties. Complete the appropriate right-to-work check before employment begins, arrange Employers’ Liability insurance where required and provide the employment documentation that applies to the role.

Checklist action: Record the agreed pay arrangements and confirm who will approve any changes.

3. Check Whether You Need to Register for PAYE

Most employers need to operate Pay As You Earn, or PAYE, through which HMRC collects employment Income Tax and National Insurance.

Check HMRC’s registration conditions rather than assuming that employing one person, or paying a small amount, automatically removes the requirement. An employee’s other work, pension income or benefits can also be relevant.

Where registration is required, register before the first payday. HMRC says you cannot register more than two months before you start paying people. Allow time to receive the references needed for reporting.

If your references have not arrived by payday, follow HMRC’s instructions for running payroll, storing the submission and reporting it once the reference is available.

Checklist action: Check the registration requirement early and keep your employer references securely.

4. Collect Complete Starter Information

Ask your employee for their full name, address, date of birth, start date, National Insurance number where available and bank details.

You will normally use their P45 to obtain previous pay, tax and other starter information. If they do not have a recent P45, ask them to complete HMRC’s starter checklist.

Check whether student or postgraduate loan deductions apply and use HMRC’s instructions to establish the correct tax code and starter declaration. Avoid guessing missing information or copying the settings used for someone else.

Collect and store personal information securely, with access limited to those who need it.

Checklist action: Complete a starter form and check the payroll entries against the supporting information before processing pay.

5. Choose How Payroll Will Be Managed

You can run payroll using suitable software or appoint a provider. Either way, someone needs to collect information, approve the figures and ensure payments happen on time.

When comparing software, consider HMRC reporting, payslips, pension compatibility, support and how it handles changes such as sickness or a mid-month start.

If you would prefer support with setup, deductions and submissions, specialist payroll accountants can help establish a workable process. Agree the scope, information deadlines and approval responsibilities before the first pay run.

Outsourcing does not remove your responsibilities as the employer, so keep oversight of the reports and payments.

Checklist action: Name the person responsible for payroll and set a deadline for supplying and approving information.

6. Prepare for Workplace Pension Duties

Your workplace pension duties begin when your first member of staff starts work. Assess their age and earnings to establish which duties apply.

Where automatic enrolment is required, arrange a suitable pension scheme and the correct contributions. Even if your employee does not need to be automatically enrolled, you can still have duties, including communicating with them.

Put the relevant dates in your calendar. New employers generally need to complete their declaration of compliance with The Pensions Regulator within five months of their duties start date.

If you use postponement, check its conditions and communication requirements rather than treating it as a general exemption.

Checklist action: Assess your employee, organise the required pension arrangements and record your communication and declaration deadlines.

7. Check the First Pay Run Before Releasing It

Review the first calculation carefully, especially if the employee starts part-way through a pay period or works variable hours.

Check gross pay, approved hours, the tax code, National Insurance category, pension contributions and any student loan deductions. Confirm that the bank payment matches the net pay shown on the payslip.

Provide the payslip on or before payday. It should show gross pay, deductions and net pay, plus hours where pay varies according to time worked.

When operating PAYE, report pay and deductions to HMRC through a Full Payment Submission, normally on or before payday.

Checklist action: Approve the calculation, issue the payslip, submit the required report and arrange the wage payment as distinct tasks.

8. Schedule Payments Beyond Payday

Paying your employee does not complete the payroll cycle. You also need to settle the amounts due to HMRC and your pension provider.

For employers paying PAYE monthly, electronic payments normally need to reach HMRC by the 22nd of the following tax month. Some small employers can arrange quarterly payment. Check your own payment schedule and allow for bank processing times.

Submitting a payroll report does not transfer the money. Reconcile what you owe and confirm that each payment has been made.

Checklist action: Maintain separate reminders for wages, HMRC payments and pension contributions.

9. Keep Records and Repeat the Checks

Keep records of pay, deductions, submissions, HMRC payments, tax code notices and relevant absences.

HMRC payroll records generally need to be retained for three years from the end of the tax year concerned. Other records, including minimum wage and pension records, can have different retention requirements, so avoid applying one deletion date to everything.

After the first payday, review what worked. Were hours approved promptly? Did the employee understand the payslip? Were all payments and submissions completed?

Build those checks, even if you’re using payroll software for small businesses, into a regular routine and plan for year-end tasks as well as monthly processing. A reliable payroll process should continue to work when you are busy or away from the business.