During October’s Facebook Live, I demystified the financial obligations and costs of becoming an employer for the first time, providing a clear checklist of actions. I covered the essential financial steps, including registering as an employer with HMRC, understanding PAYE, calculating Employer’s National Insurance contributions, auto-enrolment pension obligations, and the costs to factor into your budget beyond just salary.
Are you thinking of hiring in the next 6 months?
It’s A Big Step!
Hiring your first employee and becoming an employer is a very big step for a business. It is a sign that your business is growing and becoming a success, but it also comes with serious legal and financial responsibilities. This blog will break down the financial side into manageable steps.
Step 1: The Hidden Costs – Budgeting Beyond Salary
The “true cost” of an employee is not just their wage. You need to budget for Employer’s National Insurance Contributions and Employer’s Pension Contributions. You also need to budget for potential costs such as recruitment fees, equipment, software licenses, and insurance (Employer’s Liability is a legal requirement).
Employer’s Liability Insurance is a policy that covers you if an employee becomes ill or is injured as a result of working for you. You can read more about Employer’s Liability Insurance on the Government website.
For those who have hired staff, what was the one cost that surprised you the most?
Step 2: Registering as an Employer
You must register with HMRC before your first payday. You can do this online, and once registered, you will receive your employer’s PAYE reference number, which will be sent to you in a letter.
To start the process of registering, go to the Government website and follow the instructions on the screen.
You need to make sure you register in plenty of time so you have the necessary information before you pay your employees for the first time, but you cannot register more than 2 months before you start paying employees.
What’s your biggest worry about becoming an employer?
Step 3: Understanding PAYE (Pay As You Earn)
PAYE, or Pay As You Earn, is HMRC’s system for collecting income tax and National Insurance from employment. You, as the employer, are responsible for calculating and deducting these from your employee’s pay and paying them to HMRC.
Income Tax is a tax that is deducted from your income once you have exceeded your personal allowance. The personal allowance is currently £12,570. The amount of income tax you pay depends on your wage. The employer pays this amount to HMRC on your behalf.
The current income tax rates are as follows:
Personal Allowance – up to £12,570 – 0%
Basic Rate – from £12,571 to £50,270 – 20%
Higher Rate – £50,271 to £125,140 – 40%
Additional rate – over £125,140 – 45%
National Insurance is another tax that funds specific state benefits and the State Pension. Two types of National Insurance Contributions affect employees. Employee’s National Insurance, which is also referred to as Class 1 Contributions. It is deducted from your income and paid to HMRC by your employer on your behalf. The amount you pay for Class 1 NI depends on your age, if you are under the State Pension Age, and are earning more than £242 a week from one job. If you earn between £125 and £242 a week, you don’t usually pay Class 1 NI, but you may still earn an NI credit. If an employee earns less than £125 a week from one job, they can choose to pay voluntary Class 3 Contributions. For the 2025/2026 tax year, if you earn between £242 and £967 a week (£1048 to £4189 a month), your NI rate is 8%. If you earn over £967 a week (£4189 a month), your NI rate is 2%.
Employer’s National Insurance is paid by the employer, on top of the employee’s salary. The rates for the 2025/2026 year, for most employees, will be 15% on wages from £96 to £481 a week (£417 to £2083 a month), 15% on wages from £481.01 to £967 a week (£2083.01 to £4189 a month), and 15% on wages over £967 a week (£4189 a month).
Employers will also need to pay Class 1A and 1B National Insurance on any expenses and benefits they give to their employees. The current rate for this is 15%.
You can read up more about the National Insurance Rates by going to the HMRC website.
The good thing is that there is a lot of different payroll software out there that will do all these calculations for you. You do need to ensure that whatever software you choose to use, it is recognised by HMRC as RTI Compliant Software. RTI stands for Real Time Information.
Cloud accounting software usually has payroll built in, though you may have to pay an additional fee for that function. QuickBooks Online has two different payroll subscriptions to choose from. Xero, Sage Online, and FreeAgent all have the ability to deal with payroll. There are also different software options available that only deal with payroll. If you are using software that is only for payroll, you will need to import that information into your accounts software to ensure that your accounts are correct.
Step 4: Workplace Pensions (Auto-Enrolment)
In October 2012, new legislation came into play that stated employers who had more than 250 employees must automatically enrol eligible employees into a workplace pension scheme. It was gradually rolled out over a number of years, until all employers had to follow the new legislation from February 2018.
An employee is eligible for auto-enrollment if they are classed as a worker (anyone who works under a contract of employment), between 22 years old and the State Pension age, and earn at least £10,000 a year. However, if you are a sole director limited company, and there is no other employee, you do not need to follow auto-enrollment.
You can check whether you need to follow auto-enrollment by visiting the Pension Regulator’s website. There is a lot of information on their website about what your responsibilities are in regards to pensions. If you are a new employer, you can visit a specific page on their website that allows you to answer some questions, and it will give you a tailored duties timeline about what you need to do and by when.
The current contribution rates are as follows:
- Employer’s Contribution must pay a minimum of 3%
- Employee’s Contribution must pay a minimum of 5%
The total minimum contribution that must be paid towards an employee’s pension is 8% of an employee’s qualifying earnings. For the 2025/2026 tax year, the qualifying earnings fall between £6,240 and £50,720.
Contributions towards an employee must be made from their first day of employment. As long as the employee’s wage is over £10,000, they will be automatically enrolled in the pension scheme. However, an employee can opt out of their workplace pension scheme as long as they do this during the first month they are employed. As long as they opt out in the first month, any contributions that they have paid will be refunded to them. They can still opt out at any time, but they won’t get their contributions back until they retire. To opt out, the employee needs to ask their pension provider for an opt-out notice, which should be included in their welcome pack. They need to complete the form and give it to their employer.
Hiring your first employee is a huge milestone. Getting the payroll and pensions right from day one is critical. If you are planning to grow your team, let’s talk. I can help you with getting your payroll all set up and ensure you’re compliant from the start. Please feel free to email me.