Becoming an employer
Taking on your first employee is a big step forward that means your business is growing.
It also means you’ll need to get to grips with some new tasks. We’ll walk you through what needs to be done, step by step.
Collecting Income Tax and National Insurance
When you employ someone, you’ll take on a new role. You’ll need to start collecting Income Tax and National Insurance from their wages and then send it to us.
This is called ‘running a payroll’ and it makes sure that anyone who works for you is paying the right amount of Income Tax and National Insurance.
We collect Income Tax and National Insurance through a system called ‘Pay As You Earn’ (or PAYE for short). You can find out more about how this works on our PAYE page.
Don’t worry, you won’t have to do the maths yourself. We’ll explain more about how payroll works later.
You also pay Employer’s National Insurance
You don’t just have to take tax and National Insurance from your workers’ pay. You also need to pay your own Employer’s National Insurance, on top of what you pay them.
The current rate for Employer’s National Insurance is 15%. You pay this on any employee’s earnings above £96 a week (or £5,000 a year).
Your payroll software will work out the amount you need to pay. It’s then added to the total you pay us each month or quarter.
You can find out more in our Understanding PAYE and Employer’s National Insurance page.
You’ll need to register as an employer
Before your employee’s first payday, you’ll need to register as an employer with us.
Helpful tip:
This can take up to 5 working days, so it’s a good idea to get yourself ready in time.
You can register as an employer on GOV.UK. Once it’s done, we’ll send you a PAYE reference number.
When to register
Not every employer needs to register as an employer and set up PAYE straight away. However, you do need to if any of these apply to your employee in the current tax year:
- they’re paid £96 or more a week
- they get expenses or benefits from you, like a company car
- they have another job
- they receive Jobseeker’s Allowance
- they receive Employment and Support Allowance
- they receive Incapacity Benefit
The tax year runs from 6 April to 5 April.
Key thing to remember:
Even if you don’t need to register, you should keep payroll records to help manage your company’s tax.
Payroll software does most of the work
Many small business owners find using software the easiest way to run their payroll. It’ll work out how much Income Tax and National Insurance you need to pay – and it also creates the payroll reports you need to send to us.
Helpful tip:
If you’re not sure about handling it yourself, you can always pay someone like an accountant or use a payroll company to do it for you.
Key thing to remember:
Some basic payroll software is free, others you pay for. You can find a list of software that works with our PAYE system on GOV.UK.
When you need to send a report
Every time you run a payroll, you’ll need to send us a report. This tells us how much you’ve paid your employee (or employees) and how much tax you’ve taken off. It’s due on or before each payday.
You won’t have to fill in any forms. Your payroll software will do everything for you and then send the report straight to us.
Paying us the money you’ve collected
Once you’ve taken Income Tax and National Insurance from your employee’s wages, you need to send it to us – along with your own Employer’s National Insurance.
Most employers do this each month. But if you think you’ll owe us less than £1,500, you can always ask us to pay once every 3 months instead.
You can easily check what you owe and manage payments online on GOV.UK or on the HMRC app.
You’ll need insurance
Now that we’ve covered payroll, the next thing you’ll need to tackle is insurance. The law says that you must have something called Employers’ Liability insurance as soon as you take someone on.
It’ll protect you if they fall ill, or if they get injured because of their work.
Key thing to remember:
You could be fined £2,500 for every day you don’t have it.
Your insurance must cover you for at least £5 million. Most policies cover £10 million and there are lots of business insurance companies you can buy this from. You can find out more about Employers’ Liability insurance on GOV.UK.
You must offer a workplace pension
As an employer, you’ll need to put anyone who works for you into a workplace pension if they are:
- aged between 22 and the State Pension age
- and they also earn more than £10,000 a year
Key thing to remember:
The current age when people can start receiving the State Pension is 66. This will rise to 67 between 2026 and 2028.
You pay money into your employees’ pensions, and they do too. The least you must pay is 3% of their earnings – that includes wages, bonuses, overtime and more.
You can find more info and tools to help you set this up on The Pensions Regulator website.
Plan for paying more than just wages
Before taking on someone, it’s a good idea to check if you can afford the full cost.
This can include:
- their salary (at least the National Minimum Wage or National Living Wage)
- your Employer’s National Insurance
- the workplace pension
- money you’ll need to pay them if they become too ill to work
- money you’ll need to pay them if they take parental leave after having a baby
Getting started is simpler than it sounds
Taking someone on means you’ll have to do a few more tasks, but thousands of small businesses take this in their stride every day. And in the long run, it’ll hopefully free you up to work on other parts of your business.
Here are 4 key things to remember when getting started:
- register with us as an employer
- choose your payroll software or use a payroll service
- run your payroll and report to us every payday
- pay what you owe us every month or quarter
Taking on your first employee is a great moment that shows you’re on the up and up. And with the right set-up, sorting out your employee’s tax will soon become just another routine part of running your business. Find out everything you need to do before employing someone on GOV.UK.