Hiring and recruitment

Before you hire your first employee

Everything you need to do before employing your first staff member.

UK-wide
Guide summary

Before hiring your first employee, you must complete seven legal steps: register with HMRC, get insurance, set up a pension, choose payroll software, create a contract, check right to work, and budget for extra costs. This avoids penalties and ensures compliance.

  • Register with HMRC (PAYE) at least 4 weeks before first payday
  • Get Employer's Liability insurance (£5 million minimum cover)
  • Set up workplace pension scheme for auto-enrolment
  • Register with Pensions Regulator within 5 months
  • Use HMRC-approved payroll software (like Xero or QuickBooks)
  • Prepare written employment contract for day one
  • Check right to work documents before employment starts
  • National Living Wage (21+): £12.71 per hour from April 2026
  • Employer NI: 15% on salary above £5,000 from April 2025
  • Total employment cost is 15-20% more than salary
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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

  1. 1

    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.

  2. 2

    Get Employer's Liability insurance

    Legal requirement from first employee. £5 million minimum cover. Get quotes from insurers - typically £100-£300/year.

  3. 3

    Set up workplace pension scheme

    Must auto-enroll eligible employees from day one. Set up scheme with pension provider before employee starts.

  4. 4

    Register with Pensions Regulator

    Declare your compliance with auto-enrolment within 5 months of employing first staff.

  5. 5

    Choose payroll software

    Select HMRC-approved RTI payroll software. Popular options: Xero, QuickBooks, Sage, FreeAgent, BrightPay (free up to 3 employees).

  6. 6

    Create employment contract template

    Prepare written statement of employment terms. Must provide on or before day one.

  7. 7

    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 (£123.25/week from April 2026), 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 (2026/27), 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
  1. 1

    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).

  2. 2

    Budget for true employment cost

    Calculate salary + employer NI (15%) + pension (3%) + insurance + software. Expect 15-20% on top of salary.

  3. 3

    Plan recruitment timeline

    Allow 4-6 weeks lead time: Register with HMRC (4 weeks), insurance (1 week), pension setup (1-2 weeks).

  4. 4

    Prepare workspace and equipment

    Desk, computer, phone, safety equipment if needed. Factor £500-£1,500 per employee.

  5. 5

    Create employee handbook

    Document policies: holidays, sickness, discipline, grievance. Prevents disputes later.

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