The first payroll run is the moment a business stops being a founder with an idea and becomes an employer with obligations. Most founders arrive at it having thought hard about the hire and almost not at all about the administration attached to it.
Here is the uncomfortable truth that most guides to payroll soft-pedal: the penalties are automatic, and they start immediately. HMRC’s Real Time Information system means there is essentially no gap between a mistake happening and it being recorded. Late filing penalties begin at £100 a month for employers with one to nine employees [1]. This is not an area where you can be roughly right and correct it at year-end. That era ended in 2013.
This piece covers when you must register, what the 2026/27 numbers actually are, the pension duties that begin on day one, what changed this April, and the mistakes that cost new employers money.
When you must register for PAYE
You must register as an employer and have a PAYE scheme in place before your first payday, not after. Registration is required if any of the following apply [1]:
An employee earns at or above the Lower Earnings Limit, which is £123 a week in 2026/27. An employee receives expenses or benefits that are reportable. A new employee has had another job in the same tax year, or has received jobseeker’s allowance or a similar benefit. Or you are employing someone who already receives a pension.
Two things founders get wrong here.
The first is assuming a small salary avoids the requirement. Paying yourself £5,000 a year to sit at the employer National Insurance secondary threshold still requires a PAYE scheme and RTI submissions [1]. The salary being small does not make it invisible.
The second is the opposite error. A director who takes no salary at all and draws only dividends does not technically need a PAYE scheme [1]. Most still benefit from a modest salary to secure a qualifying year for the State Pension, but the obligation itself is not automatic.
Registration takes a few days and cannot be rushed on the morning of payday. Start it a fortnight before you need it.
The 2026/27 numbers
Personal allowance: £12,570.
Employer National Insurance: 15 per cent on earnings above the secondary threshold of £5,000 a year, which is £96 a week [2]. That threshold fell from £9,100 in April 2025, which made employment materially more expensive and is the change most small employers still have not fully absorbed.
Employee National Insurance: 8 per cent between £12,570 and £50,270, then 2 per cent above.
Employment Allowance: up to £10,500 for eligible employers in 2026/27, and the previous £100,000 eligibility cap has been removed [3]. It is claimed through an Employer Payment Summary rather than automatically. It is not available where the only employee is also a director, which catches out single-director companies who assume they qualify.
Auto-enrolment qualifying earnings: £6,240 to £50,270 [4].
Payments to HMRC are due within 14 days of the end of the tax month, or 17 days if you pay electronically [5].
Pension duties start on day one.
This is the obligation most first-time employers underestimate, because it feels like something that applies to larger businesses. It does not. Auto-enrolment duties apply from the day your first employee starts [4].
Under the Pensions Act 2008, you must automatically enrol every eligible jobholder into a qualifying workplace pension scheme. An eligible jobholder is a UK worker aged 22 or over, earning more than £10,000 a year, working in the UK [5].
The statutory minimum total contribution is 8 per cent of qualifying earnings, of which the employer must contribute at least 3 per cent and the employee at least 5 per cent, including tax relief [4]. Contributions run through the same payroll system as PAYE.
Two mechanics catch people out. Workers can opt out within one month of enrolment and receive a refund, but you cannot encourage them to, and inducement is an offence. And you must re-enrol eligible staff every three years, which is a date most small employers forget entirely and which The Pensions Regulator takes seriously [5].
Build the real cost into your hiring decision. On a £30,000 salary, employer National Insurance and the minimum pension contribution add several thousand pounds before you have paid for equipment, insurance or anything else.
What changed this April
2026/27 brings the most significant single-year shift in employer compliance obligations in recent years [6].
The Employment Rights Act 2025 introduced new duties from April 2026. The Fair Work Agency is now operational with proactive inspection powers, meaning enforcement is no longer purely complaint-driven. And the maximum protective award for failure to consult on collective redundancies has doubled [6].
Statutory Sick Pay has also been reformed for 2026/27 [4].
For a business hiring its first employee, the practical implication is that written contracts, accurate records and correct process matter more than they did eighteen months ago, and that an agency now exists which may look without being asked to.
The first payroll run, step by step
- Register for PAYE with HMRC before the first payday. You will receive a PAYE reference and an Accounts Office reference, which are different things and both needed.
- Choose HMRC-recognised payroll software. Free options exist for very small employers. Whatever you choose must handle RTI submissions, because manual filing is not available.
- Get the employee’s details. P45 from their previous employer, or a starter checklist if they do not have one. This determines the tax code, and a wrong code creates problems that persist for months.
- Set up the workplace pension before the first payday. Assess the employee, enrol them if eligible, and write to them within the statutory window. Doing this after the first run means correcting it.
- Fix the pay date and keep it. Changing pay dates later affects tax periods and reporting. Decide once.
- Submit the Full Payment Submission on or before payday. Not after. This is the single most common source of automatic penalties.
- Submit an Employer Payment Summary if you are claiming Employment Allowance or recovering statutory payments [5]. The allowance is not applied unless you claim it.
- Arrange employers’ liability insurance. Legally required from the moment you employ someone, with a £5 million minimum, and the penalties for going without are severe.
The mistakes that cost new employers money
Registering after the first payment. Straightforward, avoidable, and it generates penalties immediately.
Filing the FPS late. HMRC monitors submissions against expected patterns and contacts employers who appear to have missed one. Penalties start at £100 a month for the smallest employers [1].
Treating an employee as self-employed. The most expensive mistake available to a new employer. HMRC’s employment status rules turn on the nature of the working relationship, not the wording of the contract [5]. Getting this wrong produces backdated tax, National Insurance and penalties, and the assessment happens years later when the sums have grown.
Forgetting the Employment Allowance. Up to £10,500 that must be claimed through an EPS. Employers routinely pay National Insurance they did not owe.
Missing the pension assessment date. Auto-enrolment duties begin with the first employee, not at some later size threshold, and The Pensions Regulator enforces them.
Budgeting only for the salary. Employer National Insurance at 15 per cent above £5,000, minimum pension contributions, employers’ liability insurance and holiday pay all sit on top. The true cost of a hire is meaningfully above the headline.
Paying cash or informally at the start. Small businesses sometimes run the first month or two informally with the intention of tidying it up. RTI means there is no tidying up. There is only a late submission.
When to bring in help
Payroll for one or two employees is genuinely manageable with recognised software and a consistent monthly process. Most founders can run it.
It stops being manageable at three points when you take on staff with variable hours or multiple pay rates, because the calculations multiply. When statutory payments start, such as sick pay, maternity or paternity, because the rules are detailed and the recovery mechanics are their own subject. And when you cross into territory where a mistake is expensive, which for most businesses is around five employees.
A payroll bureau for a small business typically costs less per month than a single penalty, which is the arithmetic most founders work out only after the first penalty.
The principle underneath all of this
Payroll is not a finance task; it is a compliance system with a monthly deadline that never moves. The founders who find it painful are almost always the ones who set it up in a hurry the week the first employee started—the founders who find it trivial spent an afternoon on it a fortnight beforehand.
The administration is not the hard part of employing someone. Getting the hire right is. But the administration is the part that generates automatic penalties, so it is worth an afternoon.
Hiring your first employee and unsure whether the business can carry the full cost? SGI has advised more than 2,000 businesses across 47 industries since 2014, and the true cost of a first hire is one of the most commonly underestimated numbers in a growth plan. Book a conversation or read about Business Consulting.
SGI is not a tax, payroll or employment law adviser. Rates and thresholds change every April. Confirm your position with HMRC guidance, The Pensions Regulator or a qualified accountant before acting.
Frequently Asked Questions
When exactly do I need to register for PAYE?
Before your first payday, registration is required if an employee earns at or above the Lower Earnings Limit of £123 a week in 2026/27, receives reportable expenses or benefits, has had another job in the same tax year, or already receives a pension. Allow a fortnight, because registration is not instant.
Do I need PAYE if I only pay myself?
Suppose you take a salary at or above the Lower Earnings Limit, yes. A director paying themselves £5,000 a year to sit at the secondary threshold still needs a scheme and RTI submissions. A director taking only dividends does not technically need one, though most benefit from a modest salary for State Pension purposes.
What does an employee actually cost above their salary?
Employer National Insurance at 15 per cent above £5,000, a minimum pension contribution of 3 per cent of qualifying earnings, employers’ liability insurance, and holiday pay on a mid-range salary that adds a meaningful percentage before equipment or software.
When do pension duties start?
From the day your first employee starts. There is no size threshold. You must assess them, enrol them if they are aged 22 or over and earning more than £10,000 a year, write to them within the statutory window, and re-enrol eligible staff every three years.
What happens if I file a submission late?
Penalties are automatic and start at £100 a month for employers with one to nine employees. HMRC monitors submissions against expected payment patterns, so a missed month is noticed rather than overlooked.
Can I just pay someone as a contractor instead?
Only if the working relationship genuinely is a contractor relationship. HMRC assesses the substance of the arrangement rather than the wording of the contract, and getting it wrong produces backdated tax, National Insurance and penalties assessed years later. Take advice before the arrangement begins, not after.
References
- Protax, How to set up PAYE UK 2026: step-by-step guide, May 2026. https://www.protax.org.uk/articles/how-to-set-up-paye-uk-2026/
- Holloway Davies, Register for PAYE online: HMRC guide for UK employers, May 2026. https://www.hollowaydavies.co.uk/blog/payroll-and-paye/how-to-register-for-paye-uk-employers
- Pearson May, Employing your first member of staff: the payroll basics, May 2026. https://www.pearsonmay.co.uk/resources/blog/employing-your-first-member-of-staff/
- Consultax, A practical guide to UK payroll for small businesses 2026/27, July 2026. https://www.consultax.co.uk/blog/a-practical-guide-to-uk-payroll-for-small-businesses-2026-27/
- HM Revenue and Customs, Rates and thresholds for employers 2026 to 2027, GOV.UK. https://www.gov.uk/government/publications/rates-and-thresholds-for-employers-2026-to-2027
- IRIS, The definitive guide to UK payroll and HR compliance 2026/27, June 2026. https://www.iris.co.uk/blog/hr/payroll/uk-payroll-workforce-compliance-guide/
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Kurt Graver is the founder and CEO of SGI Consultants, a business consultancy that has helped over 2,000 entrepreneurs establish successful startups using systematic business development methodologies. An accountant with an MBA and 25 years of commerce and consultancy experience, Kurt specialises in strategic planning, market analysis, and sustainable business growth