Guide
Before you hire your first employee
Everything you need to do before employing your first staff member.
Hiring your first employee brings legal duties from day one. Complete these steps before your new employee starts to avoid penalties and ensure compliance.
Seven legal requirements before hiring
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Register as employer with HMRC (PAYE)
Register at least 4 weeks before first payday. You'll receive PAYE reference immediately, activation codes by post within 10 days.
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Get Employer's Liability insurance
Legal requirement from first employee. £5 million minimum cover. Get quotes from insurers - typically £100-£300/year.
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Set up workplace pension scheme
Must auto-enroll eligible employees from day one. Set up scheme with pension provider before employee starts.
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Register with Pensions Regulator
Declare your compliance with auto-enrolment within 5 months of employing first staff.
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Choose payroll software
Select HMRC-approved RTI payroll software. Popular options: Xero, QuickBooks, Sage, FreeAgent, BrightPay (free up to 3 employees).
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Create employment contract template
Prepare written statement of employment terms. Must provide on or before day one.
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Set up right to work checking process
Understand what documents to check (List A or List B). Check and copy documents before employment starts.
Budget for employer costs
The true cost of employment is 15-20% more than salary. Factor in these mandatory costs:
Your total costs include wages plus these employer contributions:
- Salary
- Base pay (must meet National Minimum Wage rates above)
- Employer National Insurance
- 15% on salary above £5,000 (from April 2025). E.g., £25k salary = £3,000 employer NI
- Pension contributions
- Minimum 3% employer contribution for auto-enrolled employees. E.g., £25k salary = £750/year
- Employer's Liability insurance
- £100-£300/year typically (more for high-risk sectors like construction)
- Holiday pay
- 5.6 weeks (28 days) statutory minimum. Budget 12.07% on top of hourly rate to cover holiday pay
- Payroll software
- £5-£15/month for cloud-based payroll (or free for BrightPay up to 3 employees)
- Statutory payments
- Budget for SSP (£118.75/week from April 2025), statutory maternity/paternity pay
Example: True cost of £25,000 salary employee
- Base salary: £25,000
- Employer NI: £3,000 (15% on £20,000 above £5,000 threshold)
- Pension contribution: £750 (3% of £25,000)
- Holiday pay accrual: Included in salary but factor 12.07% for hourly workers
- EL insurance: £200 (estimated)
- Payroll software: £120/year
Total annual cost: £29,070 (16.3% more than base salary)
Employment Allowance: Can offset up to £10,500 of employer NI (2025/26), reducing cost significantly for small employers.
Check employment status before hiring
Decide whether your worker is an employee or self-employed contractor. Get this wrong and HMRC can charge you years of unpaid tax, NI, and penalties.
Signs of an employee
- You control how, when, and where they work
- They work regular hours for you
- You provide equipment and materials
- They get employee benefits (holiday, sick pay)
- You deduct tax and NI through PAYE
Signs of a self-employed contractor
- They control how work is done
- They can send a substitute
- They work for multiple clients
- They provide their own equipment
- They invoice you and handle their own tax
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Use HMRC's employment status tool
Check whether worker should be employed or self-employed using CEST tool (gov.uk/guidance/check-employment-status-for-tax).
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Budget for true employment cost
Calculate salary + employer NI (15%) + pension (3%) + insurance + software. Expect 15-20% on top of salary.
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Plan recruitment timeline
Allow 4-6 weeks lead time: Register with HMRC (4 weeks), insurance (1 week), pension setup (1-2 weeks).
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Prepare workspace and equipment
Desk, computer, phone, safety equipment if needed. Factor £500-£1,500 per employee.
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Create employee handbook
Document policies: holidays, sickness, discipline, grievance. Prevents disputes later.