How to Run Payroll for the First Time: A UK Small Business Guide

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Introduction

Taking on your first employee is a genuine milestone. It also means you’ve inherited a set of legal obligations — payroll, Real Time Information submissions, auto-enrolment pensions, and deadlines HMRC takes seriously.

This guide walks through the sequence, from registering as an employer to paying HMRC, in plain English. It also covers the day-one duties that sit alongside payroll and get missed, because some of those carry heavier penalties than anything in the payroll process itself.

Before You Start: The Duties That Aren’t Payroll

Payroll guides tend to skip these, and they’re the ones that cost the most.

Right to work checks. You must check your employee’s right to work in the UK before their employment starts. Civil penalties for employing someone without the right to work are substantial and charged per worker. Do the check, keep a dated copy, and don’t let it slide because you’re busy.

Written statement of employment particulars. Your employee is entitled to a written statement of their main terms on or before their first day — not within two months, as was the case historically. This covers pay, hours, holiday, place of work, notice and more.

Employers’ liability insurance. Legally required for most UK employers, with a penalty of up to £2,500 for every day you’re uninsured. Arrange it before their first day, not after.

National Minimum Wage. Check the current rate for your employee’s age band and make sure your offer clears it. Rates change every April.

None of these are handled by payroll software. Sort them first.

Step 1: Register as an Employer with HMRC

You must register before your first employee’s first payday.

The Timing Window Nobody Mentions

There’s a firm limit at both ends. You cannot register more than two months before you start paying people — HMRC won’t accept an earlier application. So “register as soon as you decide to hire” isn’t possible if that’s three months out.

At the other end, processing times vary considerably. Guidance and practitioner experience range from around five working days to fifteen or more, and longer at busy periods. The practical advice from most accountants is to register four to six weeks before your first payday. That sits inside the two-month window while allowing for delays.

You’ll receive an Employer PAYE Reference and an Accounts Office Reference by post. You need both to make submissions and payments.

Register online through GOV.UK.

If Your References Haven’t Arrived by Payday

This is the situation the two-month rule can leave you in, and there is a proper answer rather than a panic.

Pay your employee on time regardless. Run payroll as normal, calculate the correct deductions, prepare your Full Payment Submission, and hold it. Once your references arrive, submit the FPS as a late submission. HMRC generally accepts this where you’ve registered promptly and acted in good faith.

What you must not do is delay paying your employee because your paperwork hasn’t caught up.

When Do You Need to Register?

You must register if you’re paying an employee at or above the relevant National Insurance threshold, or if they have another job, receive a pension, get expenses or benefits, or receive statutory pay. Check the current thresholds on GOV.UK — these change each April, and quoting stale figures here would do you more harm than good.

Step 2: Choose HMRC-Recognised Payroll Software

HMRC requires payroll data to be submitted electronically through Real Time Information. You cannot track pay in a spreadsheet and call it done.

Confirmed costs, which are lower than most people expect:

• FreeAgent is free with a NatWest, Royal Bank of Scotland, Ulster Bank or Mettle business account, and includes payroll for small limited companies. Otherwise £19 a month ex-VAT for sole traders, £33 for limited companies
• Sage Payroll from £1.20 a month ex-VAT — the cheapest confirmed paid option
• Xero Payroll as an add-on to Xero, which starts at £16 ex-VAT for Ignite
• QuickBooks Payroll as an add-on; QuickBooks starts at £10 ex-VAT for Sole Trader Plus
• BrightPay and Moneysoft, both widely used — check current pricing
• HMRC’s Basic PAYE Tools is free

One Thing to Know About Basic PAYE Tools

It’s free and it handles RTI submissions correctly, but two limitations matter:

• It’s only available to employers with up to 10 employees
• It does not generate payslips — and as covered below, providing a payslip is a legal requirement

So if you use Basic PAYE Tools, you need another way to produce compliant payslips. For most first-time employers, paying £1.20 a month for software that does both is the simpler answer.

What to look for otherwise: HMRC recognition and RTI capability, auto-enrolment integration, payslip generation, decent support for beginners, and UK-specific design — be wary of software built primarily for US markets.

Step 3: Gather Your Employee’s Details

Get this wrong and you’ll apply the wrong tax code, meaning your employee pays too much or too little — and HMRC will want it sorted either way.

What you need:

• Full name, address and date of birth
• National Insurance number
• Their P45 if they’ve worked elsewhere in the current tax year, or a Starter Checklist if not

The Starter Checklist, previously the P46, tells you which statement applies — first job of the year, another job, or receiving a pension. That determines the tax code you use until HMRC issues a formal one. Download the current version from GOV.UK.

Step 4: Understand Your Auto-Enrolment Duties

One of the most commonly overlooked obligations. Even with one member of staff, you may have pension duties from day one.

The Pensions Regulator requires you to assess your workforce and automatically enrol eligible workers into a qualifying scheme, with employer contributions.

An eligible jobholder is generally someone who:

• Is aged between 22 and State Pension age
• Earns above the automatic enrolment earnings trigger — check the current figure with TPR
• Works or ordinarily works in the UK

You cannot opt out because you’re small. Workforce size doesn’t exempt you.

You must also declare compliance to The Pensions Regulator within five months of your duties start date. Missing this brings fixed penalty notices.

Qualifying providers used by small employers include NEST, which is free to use and has a statutory obligation to accept any employer, along with People’s Pension and NOW: Pensions.

Step 5: Run Your First Pay Period

Your software will calculate gross pay, Income Tax via PAYE using the tax code, employee National Insurance, employer National Insurance — a cost to your business on top of gross pay, and one first-timers routinely forget to budget for — pension contributions, and net pay.

Double-check the output before proceeding. Errors are far easier to fix before submission than after.

Payslips

You are legally required to provide a payslip on or before payday. It must show gross pay, deductions and their reasons, and net pay. Where pay varies by hours worked, the payslip must also show the hours.

This applies to workers as well as employees. Most payroll software generates payslips automatically — Basic PAYE Tools does not.

Step 6: Submit the FPS On or Before Payday

The “on or before” rule catches out more first-time employers than anything else here.

You must submit a Full Payment Submission to HMRC on or before the date you pay your employee. Not the next working day. On or before.

The FPS tells HMRC what you’ve paid and what you’ve deducted. Your software handles the submission, but you need it ready in time.

If you’re late, HMRC can issue late filing penalties — for employers with fewer than 10 employees, these start at £100 per month. Build your payroll run into your calendar a day or two ahead of payday so a technical problem doesn’t become a penalty.

Step 7: Pay HMRC by the Deadline

Submitting the FPS tells HMRC what you owe. You then have to pay it.

Monthly: by the 19th of the following month if paying by post, or the 22nd if paying electronically.

Quarterly: available where your average monthly liability is under £1,500 and HMRC agrees.

Confirm exact dates on GOV.UK, as bank holidays affect when cleared funds must arrive. You’ll need your Accounts Office reference — note this is a different number from your PAYE reference, and using the wrong one is a common cause of payments being misallocated.

Keep payroll records for at least three years, as HMRC can inspect them.

Common Expensive Mistakes

Missing the day-one duties. Right to work checks, the written statement of particulars and employers’ liability insurance all apply from the start, and EL insurance alone carries a £2,500 daily penalty.

Registering too late — or trying too early. You can’t register more than two months ahead, and references can take weeks. Four to six weeks before payday is the window.

Missing the on-or-before RTI rule. People process payroll correctly then assume they have a few days to submit. They don’t.

Ignoring auto-enrolment for a single employee. Workforce size is irrelevant if your employee meets the criteria.

Using the wrong tax code. No P45 and no Starter Checklist means an emergency code that overtaxes your employee. It’s fixable but it erodes trust in week one.

Forgetting employer National Insurance. It’s a cost on top of gross pay, not a deduction from it. Budget for it before you agree a salary.

FAQ

Do I need payroll software for one employee?

In practice yes. RTI submissions must be made electronically, and recognised software is the only realistic route. HMRC’s Basic PAYE Tools is free and sufficient for very small payrolls, but it doesn’t produce payslips and is limited to 10 employees.

What if my PAYE reference hasn’t arrived before payday?

Pay your employee on time anyway. Run payroll, prepare the FPS, and submit it once your references arrive. HMRC generally accepts a late submission in this situation where you registered promptly. Don’t delay paying your employee.

Can I run payroll myself or do I need an accountant?

Many owners run it themselves with good software. If you’re uncomfortable with the compliance side, or your payroll is complex — variable hours, benefits in kind, several employees — a bureau or accountant takes it off your plate for a modest monthly fee. It usually comes down to confidence and time.

What is a P60 and when must I issue one?

An annual summary of pay and deductions. You must give one to every employee still employed at 5 April, by 31 May following the end of the tax year. Your software will normally generate them.

What if I make a mistake on a submission?

Minor errors can often be corrected in your next payroll run. For a tax year that has already closed, corrections are made by submitting a further Full Payment Submission with corrected year-to-date figures. Address mistakes promptly rather than hoping they’ll be missed.

Do I need employers’ liability insurance for one part-time employee?

Almost certainly yes. There’s no minimum-hours threshold, and the penalty for going without is up to £2,500 per day. Narrow exemptions exist — check whether any applies to you rather than assuming.

Conclusion

Running payroll for the first time feels daunting and becomes routine quickly. The sequence is logical: sort your day-one legal duties, register four to six weeks ahead, choose recognised software, gather your employee’s details, handle auto-enrolment, run the pay, submit the FPS on or before payday, and pay HMRC on time.

The mistakes that cost money are almost always about timing — registering too late, submitting RTI after payday, or ignoring auto-enrolment. None are complicated to avoid once you know the rules.

Our recommendation: if you bank with NatWest, RBS, Ulster Bank or Mettle, FreeAgent is free and does the job properly, payslips included. Otherwise Sage Payroll from £1.20 a month is hard to argue with for a single employee. Basic PAYE Tools is free and perfectly compliant for RTI, but you’ll need a separate route to payslips.

Whatever you choose, check it’s on HMRC’s recognised list and that you understand the deadlines before your first payday arrives.

This article is general information about running payroll, not tax, legal or accounting advice. Your PAYE obligations, auto-enrolment duties, right to work checks, employment law obligations and penalty exposure depend on your circumstances — check current GOV.UK and Pensions Regulator guidance and consult a qualified accountant, payroll professional or employment solicitor about your specific position. Rates, thresholds and HMRC processes change each April and at other times; confirm the current position before acting.