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 (£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
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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.
Legal basis
Primary legislation and key regulations