Setting up payroll
for your first employee.

When do you have to register as an employer?

Before the first payday, not after it. Registration is free and takes a few minutes online, but the PAYE reference comes back by post and can take a couple of weeks, so leaving it until the week you want to pay someone is how a first payroll runs late.

You need to register once you employ anyone paid at or above the National Insurance lower earnings limit, anyone who has another job, or anyone receiving a pension. In practice, if you are paying a real employee a real wage, assume you are registering.

Paying a director — including yourself, in a limited company — counts. A one-person company drawing a salary is an employer with a payroll obligation, even though it feels like nothing of the sort.

How do you set it up?

1. 1

   Register as an employer with HMRC

   You get a PAYE reference and an Accounts Office reference. Both are needed by your payroll software, and both arrive by post, so start here.

2. 2

   Choose payroll software that files to HMRC

   Payroll is not something you can do in a spreadsheet any more — every submission is electronic and real-time. The software has to be recognised by HMRC for RTI filing.

3. 3

   Collect the employee's details

   A P45 from their last job if they have one, or a starter declaration if they do not. This is what sets their tax code, and getting it wrong is the most common cause of a wrong first payslip.

4. 4

   Set up a workplace pension

   You have to assess every member of staff for automatic enrolment from their first day and enrol anyone who qualifies. The earnings trigger is reviewed annually — check the current figure with The Pensions Regulator.

5. 5

   Run a test payroll before the real one

   Run the first period, look at the numbers, and check the take-home pay is what you told the employee it would be. Correcting a submitted payroll is far more work than checking an unsubmitted one.

What has to happen every payday?

• —A Full Payment Submission goes to HMRC on or before the day you pay, not afterwards. Late FPS filing is the most common payroll penalty there is.
• —Every employee gets a payslip on or before payday, showing gross pay, deductions and net pay.
• —PAYE and National Insurance are paid to HMRC by the 22nd of the following month electronically, or the 19th by post.
• —Pension contributions are deducted and paid across to the scheme within the deadline your provider sets.
• —An Employer Payment Summary goes in by the 19th of the following month in any month where one is needed — for example a month where you have paid nobody at all.

What does it cost, and what goes wrong?

The visible cost is the wage. The real cost is the wage plus employer National Insurance, plus the employer pension contribution, plus holiday — someone on a five-day week accrues 5.6 weeks of paid leave a year, which is roughly a month you pay for and receive no work in return for. Budget on total cost, not the headline salary.

The two things that go wrong most often are both timing: filing the FPS after payday rather than on or before it, and missing the 22nd for payment. Neither is difficult, and both need a date in the calendar rather than a good intention.

The third is the tax code. If a new starter has no P45 and the starter declaration is filled in loosely, they end up on an emergency code, pay too much, and come to you about it — a conversation avoided entirely by asking the right question on day one.