If you’re about to employ someone for the first time, you need to set up payroll before their first payday. That means registering with HMRC, choosing how you’ll process pay, understanding what you’re responsible for, and getting the right systems in place. It’s not as complicated as it sounds, but there are several steps that need to happen in the right order and missing any of them can lead to penalties.
This guide walks through the entire process from scratch, covering everything a first time employer needs to know.
Step 1: Register as an employer with HMRC
You must register as an employer with HMRC before your first payday. You can register up to two months in advance, but not earlier. Most businesses register online through GOV.UK’s ‘Register as an employer’ service. HMRC will issue you with two reference numbers: an Employer PAYE Reference (used for all payroll reporting) and an Accounts Office Reference (used when making payments to HMRC). These typically arrive within 5 to 15 working days.
You need to register if you’re paying any employee at or above the secondary threshold (£96 per week, £417 per month, £5,000 per year for 2026/27), if the employee has another job, if they receive a pension, or if you provide benefits. If you’re a limited company director paying yourself a salary, you need to register even if you’re the only person on the payroll.
If your PAYE reference hasn’t arrived before your first payday, don’t panic. Run payroll as normal, store the Full Payment Submission, and submit it to HMRC as a late FPS once your reference number arrives.
Step 2: Choose your payroll method
You have three options. First, you can run payroll yourself using commercial software (BrightPay, Sage, Xero Payroll, FreeAgent, or HMRC’s free Basic PAYE Tools for employers with up to 10 employees). Second, you can use an accountant who offers payroll as an add on service. Third, you can use a dedicated payroll bureau that handles everything for you. For most first time employers, the third option is the quickest way to get compliant without a steep learning curve.
The choice often comes down to how much time you want to spend on payroll versus how much you’re willing to pay for someone else to do it. Software costs £5 to £25 per month but requires your time and knowledge. A bureau costs more but removes the admin entirely. Our guide to payroll frequency can help you decide whether to run weekly, monthly, or four weekly pay.
Step 3: Collect employee information
Before the first pay run, you need specific information from each employee. If they have a P45 from a previous employer, it provides their tax code and year to date pay and tax figures. If they don’t have a P45 (common for first jobs, people returning to work, or employees coming from self employment), they need to complete a Starter Checklist. This tells you which statement applies to them, which determines their initial tax code. For more on the P45 and Starter Checklist process, see our guide to starters, leavers, and P45s.
You’ll also need their full name, address, date of birth, National Insurance number, and bank details for BACS payment.
Step 4: Set up workplace pensions
If your employee is aged between 22 and State Pension age and earns more than £10,000 per year, you have an auto enrolment duty. You must enrol them into a qualifying workplace pension scheme and make minimum employer contributions (currently 3% of qualifying earnings). Even if you’ve never run payroll before, the pension obligation kicks in from day one of employment. Our auto enrolment page covers the full process.
You need to choose a pension provider (NEST, The People’s Pension, Smart Pension, and others accept all employers) and set up the scheme before your first employee’s enrolment date. If you use a payroll bureau, they’ll typically manage the pension file uploads and contribution calculations as part of the service.
Step 5: Run your first payroll
On or before your first payday, your payroll system (or bureau) calculates gross pay, deducts income tax (using the employee’s tax code), deducts employee NIC (if earnings exceed the primary threshold of £12,570 per year), deducts any student loan repayments, deducts the employee’s pension contribution, and produces a payslip showing all of these figures.
A Full Payment Submission (FPS) must be sent to HMRC on or before the payment date. This reports the employee’s earnings, tax, NIC, and any other deductions for that pay period. If you owe more tax and NIC to HMRC than you’ve claimed through Employment Allowance or statutory payment recoveries, you pay the balance by the 22nd of the following month (19th if paying by post).
What happens after the first pay run
Payroll is ongoing. Every pay period you repeat the process: collect any changes (hours, pay rises, new starters, leavers), run the calculations, generate payslips, submit the FPS, and pay HMRC. At year end (5 April), you submit a final FPS, issue P60s to all employees, and update your system for the new tax year’s rates and thresholds. It’s manageable if you stay on top of it, and a real headache if you fall behind. Check our pricing to see what it would cost to hand the whole thing over, or get in touch and we’ll walk you through the options.
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