How to run payroll for your first employee: a step-by-step guide

Hiring your first employee is a milestone — and it also makes you a PAYE employer, with legal duties that begin before the first payday. None of them is difficult once you can see the whole process laid out. This guide walks through every step: registering with HMRC, collecting your employee’s details, running the pay run, reporting it in real time, giving a payslip, paying HMRC, and handling your pension duties.

Step 1: Register as an employer with HMRC

Before you can pay anyone through payroll, you normally need to register as an employer with HMRC and get a PAYE reference. You must register if you pay an employee above the lower earnings limit, if any employee has another job or receives a pension, or if you provide expenses or benefits. The current lower earnings limit is published on GOV.UK.

Register before the first payday, and allow time for HMRC to send your references — it can take a while, and you cannot file anything without them. You cannot register more than two months before you start paying people. We cover the whole process, including what to do if your reference has not arrived by payday, in our guide to registering as an employer with HMRC.

When registration completes you receive two references you will use constantly: your employer PAYE reference (which goes on payroll filings and employee forms) and your Accounts Office reference (which you quote when paying HMRC).

Step 2: Get your employee’s details

To set an employee up correctly you need their personal details — full name, date of birth, address and National Insurance number — plus the information that determines how much tax to deduct.

The key document is the P45 from their previous job. It shows their tax code, previous pay and tax in the current tax year, and lets your software pick up where the last employer left off. If your new starter has no P45 — a first job, a return to work, or simply a lost form — ask them to complete HMRC’s starter checklist instead. Their answers (whether this is their only job, whether they have another job or pension, whether they are repaying a student loan) determine the starter declaration and the tax code to use until HMRC issues one.

Getting this step right matters: a wrong starter declaration is one of the most common causes of a new employee being over- or under-taxed in their first few payslips.

Step 3: Choose payroll software

All UK payroll reporting runs through Real Time Information (RTI) — you report pay and deductions to HMRC electronically every time you pay someone. That means you need payroll software. Your options are HMRC’s free Basic PAYE Tools (functional but bare-bones, with no payslips) or commercial payroll software that calculates deductions, produces payslips and files your submissions in one flow.

Whatever you choose, check that it can send a Full Payment Submission (FPS) and an Employer Payment Summary (EPS), produce compliant payslips, and handle starters, leavers and pension contributions. For one employee the pay run itself should take minutes, not hours.

Step 4: Set up and run your first pay run

With software in place, enter your PAYE and Accounts Office references, add your employee with the details from their P45 or starter checklist, and set the pay frequency (weekly or monthly are the most common) and the gross pay you agreed.

Two checks before you run anything. First, make sure the pay rate meets at least the National Minimum Wage or National Living Wage for the employee’s age — current rates are on GOV.UK. Second, confirm the employee’s tax code and starter declaration are entered exactly as the P45 or checklist says. Then run the pay run: the software calculates gross pay, each deduction, and the net pay to transfer to your employee.

What gets deducted from pay

Your employee’s payslip will show gross pay at the top and net pay at the bottom. In between, the usual deductions are:

• Income tax through PAYE. Calculated from the employee’s tax code and cumulative pay for the year. The code reflects their tax-free Personal Allowance and any adjustments HMRC has made.
• Employee National Insurance. Class 1 contributions deducted once earnings pass the relevant threshold for the pay period.
• Student loan repayments, if the P45 or starter checklist indicates a loan. The plan type sets the threshold and the software collects the right amount automatically.
• Pension contributions, once the employee is enrolled in a workplace pension (see below).

Separately, you as the employer pay employer National Insurance on the employee’s earnings and your own pension contribution. These are costs on top of gross pay, not deductions from it — worth knowing when you budget for the hire. Current tax and National Insurance rates and thresholds are published on GOV.UK; good software applies them for you.

Step 5: Send the FPS — on or before payday

Every pay run must be reported to HMRC in a Full Payment Submission (FPS), and the rule is strict: the FPS must reach HMRC on or before the day you pay the employee. Not the end of the week, not the end of the month — on or before the payment itself.

The FPS tells HMRC who you paid, how much, and what you deducted in tax, National Insurance and student loan. It is also how HMRC learns about new starters: your first FPS for the employee carries their starter information. Filing late without a reasonable excuse can trigger penalties, so the safest habit is to make the FPS part of the pay run itself — calculate, review, submit, then pay. Our guide to what an FPS submission is covers the contents and the late-filing rules in detail.

If there is a month in which you pay nobody at all, you must tell HMRC by sending an Employer Payment Summary (EPS) showing no payments — otherwise HMRC estimates what you owe and chases it.

Step 6: Give your employee a payslip

A payslip is a legal requirement, not a courtesy. Every employee must receive one on or before payday, showing gross pay, each deduction that varies from period to period (with the amount and what it is for), and net pay. Where pay varies by time worked, the payslip must also show the number of hours being paid.

Payslips can be paper or electronic; a secure online payslip that the employee can retrieve later is the practical choice, since employees routinely need old payslips for renting, borrowing and benefit claims.

Step 7: Pay HMRC what you deducted

The tax and National Insurance you deduct never belongs to you — you hold it and pass it on. HMRC tax months run from the 6th to the 5th, and the deadline to pay each month’s liability is:

Payment method	Deadline
Electronic (bank transfer, direct debit, online)	22nd of the following tax month
By post (cheque)	19th of the following tax month

So deductions from a payday on 28 September (tax month ending 5 October) are due by 22 October electronically. Quote your Accounts Office reference when paying, so HMRC allocates the money correctly. Employers who expect to owe less than a set amount per month can ask HMRC to pay quarterly instead — check the current threshold on GOV.UK if your payroll is small.

Because you filed an FPS for each payday, HMRC already knows what to expect. If the payment does not match the filings, you will hear about it — which is another reason accurate, on-time submissions matter.

Workplace pension duties start on day one

Automatic enrolment duties begin on your first employee’s first day — there is no grace period for new employers. You must:

• Assess the employee: age and earnings determine whether they must be automatically enrolled, can opt in, or can join voluntarily;
• Enrol them into a qualifying workplace pension scheme if they meet the criteria, and pay at least the minimum employer contribution;
• Write to them explaining how automatic enrolment applies to them;
• Declare your compliance to The Pensions Regulator within five months of your duties start date — this applies even if nobody qualified for enrolment.

You can postpone assessment by up to three months, but you must still write to the employee about it and they keep the right to opt in during postponement. Your payroll software should calculate contributions each period and produce the data your pension provider needs.

Keep your records

You must keep payroll records — what you paid, what you deducted, reports and payments to HMRC, employee leave and absence, tax code notices — for at least three years from the end of the tax year they relate to. HMRC can ask to see them, and incomplete records can lead to penalties and to HMRC estimating what you owe. Software that stores every pay run, payslip and submission acknowledgement makes this a non-issue.

Your first pay run, in order

• Register as an employer; receive your PAYE and Accounts Office references.
• Collect the P45 or a completed starter checklist.
• Set up payroll software; enter employer references and employee details.
• Check the pay rate against minimum wage; confirm the tax code.
• Run the pay run and review the figures.
• Send the FPS on or before payday.
• Give the payslip and pay the employee.
• Pay HMRC by the 22nd (electronic) of the following tax month.
• Handle pension assessment and enrolment; declare compliance.
• Keep the records for at least three years.

Run once, the cycle becomes routine: most of the steps above are one-off setup, and the repeating part — calculate, submit, payslip, pay — is exactly what payroll software automates. Taxriva was built for this: it runs the calculations, files the FPS with HMRC as part of each pay run, and gives your employee an online payslip. See Taxriva pricing if you are choosing software for your first hire.