You are currently viewing How to Run Payroll for the First Time as an Employer

How to Run Payroll for the First Time as an Employer

Taking on your first employee is a significant step. It also comes with a set of legal obligations that catch many new employers off guard. This guide walks you through exactly how to set up and run payroll for the first time in the UK — from registering as an employer with HMRC to making your first Real Time Information submission. Whether you are a sole trader hiring a member of staff, a limited company director adding your first employee, or a small business owner navigating this process for the first time, this article covers what you need to know.

Before you start: what you need in place

Before you can run payroll, you need a few things sorted. You must have a National Insurance number (or know your employee’s). You need to confirm whether you are employing someone or engaging a self-employed contractor — the distinction matters for tax and NI purposes. Misclassifying a worker as self-employed when they are actually an employee is a common and costly mistake.

You also need to check whether the construction industry scheme (CIS) applies. If you are in the construction sector and using subcontractors, CIS deductions sit separately from standard payroll. Take a look at CIS returns if that applies to you.

Confirm the employee’s start date, their agreed salary or hourly rate, and whether they have any other jobs. These details feed directly into your payroll calculations.

Register as an employer with HMRC

You must register as an employer with HMRC before you pay your first employee. You can do this online through the Government Gateway. HMRC will then send you a PAYE reference number and an Accounts Office reference number — you need both to submit payroll information and make payments.

HMRC advises registering at least two weeks before your first payday, though it can take up to five working days to receive your references. If you leave it too late, you may not have the details needed to submit on time.

You can register at GOV.UK by searching for ‘register as an employer’. Once registered, you will have access to HMRC’s PAYE Online service, which links to your payroll software.

Choose payroll software

You cannot submit payroll information to HMRC manually — you must use HMRC-recognised payroll software. HMRC publishes a list of approved software on its website. For small businesses with just one or two employees, some free tools are available.

For most small businesses, cloud-based software is the practical choice. Xero Payroll, Sage, BrightPay, and QuickBooks Payroll all handle RTI submissions automatically. If you are already using Xero for bookkeeping, adding payroll through the same platform keeps everything in one place. Xero training can help you get up and running faster if you are new to the software.

Your software needs to be capable of submitting Full Payment Submissions (FPS) and Employer Payment Summaries (EPS) to HMRC — more on those below.

Gather employee details

Before processing your first pay run, collect the following from your employee:

  • Full name and date of birth
  • National Insurance number
  • Home address
  • Start date
  • P45 from their previous employer (if they have one)
  • A completed starter checklist if they do not have a P45

The P45 or starter checklist tells you which tax code to apply. Without the right tax code, you risk deducting the wrong amount of income tax — either too much or too little.

Understand tax codes

Tax codes tell your payroll software how much income tax to deduct from each employee. The most common code in 2026/27 is 1257L, which reflects the standard Personal Allowance of £12,570. This means the employee pays no income tax on the first £12,570 of annual earnings.

If an employee does not have a P45 and does not return a starter checklist, you must use an emergency tax code. This often results in the employee paying more tax than necessary until HMRC issues the correct code.

HMRC will send tax code notices (P9) directly to you as the employer when codes change. Your payroll software should pick these up automatically if you are signed up for PAYE Online.

Calculate tax, NI, and other deductions

Payroll is not just about paying a salary. You need to calculate and deduct income tax, employee National Insurance contributions, and any other deductions such as student loan repayments or pension contributions.

Income tax

In 2026/27, the income tax rates for England and Wales are:

  • 20% on earnings between £12,570 and £50,270 (basic rate)
  • 40% on earnings between £50,270 and £125,140 (higher rate)
  • 45% on earnings above £125,140 (additional rate)

Your payroll software applies the tax code and calculates the correct deduction for each pay period automatically.

Employee National Insurance

In 2026/27, employees pay NI at 8% on earnings between £12,570 and £50,270. Earnings above £50,270 attract a lower rate — check the latest HMRC guidance for the exact upper rate as this can change.

Employer National Insurance

As an employer, you also pay National Insurance on top of the employee’s gross wage. In 2026/27, employer NI is 15% on earnings above £5,000 per year per employee. This is a cost to your business — it is not deducted from the employee’s pay.

The Employment Allowance may reduce your employer NI bill. In 2026/27, eligible employers can offset up to a set amount against their employer NI liability — check the latest HMRC guidance for the current Employment Allowance figure, as it has changed in recent years.

Pension auto-enrolment

If your employee is aged between 22 and state pension age and earns above the auto-enrolment threshold (check GOV.UK for the current figure), you must enrol them into a workplace pension scheme. You contribute as the employer, and the employee also contributes from their net pay or gross pay depending on the scheme type. You need to set this up from day one — not after a few months.

Run your first payroll and submit to HMRC

Once your software is set up and your employee details are entered, you process the pay run for the relevant period — weekly, fortnightly, or monthly depending on the pay frequency you have agreed.

After each pay run, your payroll software generates a Full Payment Submission (FPS). You must send this to HMRC on or before the employee’s payday. The FPS tells HMRC exactly what you paid each employee and what deductions you made.

If you did not pay any employees in a particular tax month but still need to tell HMRC, you submit an Employer Payment Summary (EPS) instead. You also use an EPS to claim the Employment Allowance or to report statutory payments.

Missing an FPS submission or submitting it late triggers an automatic penalty from HMRC, so build the submission into your regular process from the start.

Pay HMRC what you owe

After processing payroll, you owe HMRC the combined total of:

  • Income tax deducted from employee wages
  • Employee National Insurance deducted from wages
  • Employer National Insurance you owe as a business

This payment is due to HMRC by the 19th of the following tax month if paying by post, or by the 22nd if paying electronically. The tax month runs from the 6th to the 5th of the following month. So for wages paid in April, the payment deadline is 19th or 22nd May.

You pay using your Accounts Office reference number. Set up a standing order or pay online through HMRC’s website — missing the deadline attracts interest and potential penalties.

Ongoing payroll obligations

Running payroll is not a one-off task. Here is what you need to do regularly throughout the year:

  • Submit an FPS every time you pay employees
  • Pay HMRC by the 22nd of each month
  • Update employee records when pay, hours, or tax codes change
  • Handle leavers — issuing a P45 when an employee leaves
  • Complete year-end payroll at 5 April — submitting your final FPS and issuing P60s to all employees by 31 May
  • Renew auto-enrolment declarations with The Pensions Regulator every three years

If your business grows and payroll becomes complex, it is often worth outsourcing. A managed payroll service handles submissions, calculations, and compliance on your behalf, freeing you to focus on running the business.

Common mistakes to avoid

First-time employers make predictable errors. Here are the ones to watch for:

Registering as an employer too late

You must be registered before the first payday. If you miss this, you cannot submit RTI on time and HMRC may issue a late filing penalty.

Using the wrong tax code

Always get a P45 or completed starter checklist before the first pay run. Applying the wrong code means under or over-deducting tax — the employee then faces a tax bill or a repayment claim.

Forgetting employer NI

Many new employers only budget for the gross salary. Employer NI at 15% on earnings above £5,000 per employee adds a meaningful cost on top. Factor this into your hiring budget before you agree a salary.

Ignoring auto-enrolment

The Pensions Regulator takes auto-enrolment seriously. Non-compliance results in fixed penalty notices and escalating fines. Set up a qualifying pension scheme before you pay your first eligible employee.

Missing the FPS deadline

The FPS must reach HMRC on or before payday. Submitting it the day after payday counts as late. Most payroll software submits automatically when you finalise the pay run — check your settings to make sure auto-submit is enabled.

Misclassifying workers

Treating an employee as self-employed to avoid PAYE is not a legitimate option if HMRC determines the working relationship is one of employment. The liability for unpaid tax and NI falls on you as the engaging business.

If your business involves freelance or contract workers, seek advice on employment status before you agree terms. Freelancers and limited company contractors operate differently from employees, but the rules around IR35 and employment status are worth understanding properly.

Frequently asked questions

When do I need to register as an employer with HMRC?

You must register before your first payday. HMRC recommends registering at least two weeks in advance because it can take up to five working days to receive your PAYE reference numbers. Without these, you cannot submit RTI or make payments correctly.

Do I need payroll software to run payroll in the UK?

Yes. HMRC requires employers to submit payroll information using HMRC-recognised software. You cannot file RTI submissions manually. HMRC publishes a list of approved free and paid software options on GOV.UK.

How much employer National Insurance do I pay in 2026/27?

In 2026/27, employer NI is 15% on each employee’s earnings above £5,000 per year. This is paid by the business on top of the employee’s gross wage and is not deducted from the employee’s pay. Some employers can reduce this bill using the Employment Allowance — check HMRC’s guidance for the current allowance amount.

What is a Full Payment Submission (FPS)?

An FPS is the RTI report you send to HMRC every time you pay employees. It tells HMRC the gross pay, tax deducted, NI deducted, and other details for each employee. It must be submitted on or before each payday.

What happens if I miss an RTI submission deadline?

HMRC issues automatic late filing penalties for missed or late FPS submissions. The penalty amount depends on the number of employees on your payroll. You can appeal a penalty if you have a reasonable excuse, but it is far easier to submit on time through your payroll software.

Can a sole trader run payroll for employees?

Yes. Sole traders can employ staff and must register as an employer with HMRC, operate PAYE, and meet all the same payroll obligations as a limited company. The business structure does not exempt you from payroll rules. Bear in mind that any profits you draw as a sole trader are declared through self assessment — payroll applies only to wages paid to employees.