Payroll for Your First Employee: A Trade's Guide

Running Payroll for Your First Employee: A Trade’s Guide

Taking on your first employee means registering as an employer with HMRC, running payroll software that reports every payment to HMRC on or before payday, and issuing a payslip each time you pay them. It is more admin than paying a subcontractor through CIS, but it is a fixed, repeatable job — set it up properly once and it takes minutes a week. The mistake most trades make is leaving the setup until the week before the first payday.

Employee or subcontractor? Settle this first

Before any of the payroll steps, be certain the person actually is an employee. If they work set hours for you, use your van and materials, take instruction on how the job is done and cannot send someone else in their place, HMRC will treat them as employed regardless of what your paperwork says.

Getting this wrong is expensive. If HMRC decides a “subbie” was really an employee, you can be liable for the PAYE and National Insurance that should have been deducted, plus interest and penalties. If the person genuinely is self-employed and you are in construction, you deal with them through CIS instead — 20% deduction if they are registered, 30% if they are not.

If it is borderline, get it checked before the first payment, not after.

Step one: register as an employer with HMRC

You register online through gov.uk. HMRC then sends you a PAYE reference and an Accounts Office reference — you cannot run payroll without both, and they do not arrive instantly. Post can take a couple of weeks.

Register before the first payday. HMRC’s guidance is that you should register before you pay anyone, and you generally cannot register more than a couple of months ahead of your first payment. In practice, starting the process four to six weeks before your first employee’s start date is comfortable.

Step two: choose payroll software

You are legally required to report each payment to HMRC electronically, so you need software. There is no paper route any more.

Realistic options for a small trade firm:

Free HMRC-recognised payroll software. Fine for a handful of employees. Does the reporting, produces payslips, handles the calculations. Basic, but it works.

Your accounting package. If you are already in Xero, QuickBooks, FreeAgent or similar for Making Tax Digital, adding payroll usually costs a small monthly amount per employee and keeps everything in one place. That integration is worth paying for.

Your accountant runs it. Many trades hand payroll to their accountant or a payroll bureau for a modest monthly fee. If you have one employee and no appetite for the admin, this is often the cheapest option once you value your own time.

Whatever you choose, make sure it is on HMRC’s list of recognised payroll software and that it handles auto-enrolment pension assessment.

Step three: gather the employee’s details

Before the first payday you need their full name, address, date of birth, National Insurance number and start date. You also need a P45 from their last employer, or — if they do not have one — the answers to HMRC’s starter checklist questions, which tell you which tax code to use.

Do not guess a tax code. Using the wrong one either underpays HMRC or leaves your employee short in their first pay packet, and neither conversation is one you want on a Friday afternoon.

The employment contract

You must give a written statement of employment particulars on or before the first day of work. It covers pay, hours, holiday entitlement, place of work, notice periods and job title. Templates exist on gov.uk and through Acas. It is a legal requirement, not a nice-to-have.

Step four: run the payroll and file an FPS

Each pay period, your software works out gross pay, income tax, employee National Insurance, employer National Insurance, pension contributions and any student loan deduction. It then produces a Full Payment Submission (FPS) which must reach HMRC on or before the day you pay the employee.

That deadline is the one to burn into your diary. Late FPS filings attract penalties, and “I was on site” is not an accepted reason. If you pay weekly, that is a weekly job — most trades set a fixed slot, run payroll the day before payday, and never think about it again.

You must also give the employee a payslip on or before payday, showing gross pay, each deduction and net pay.

Step five: pay HMRC

The tax and National Insurance you deduct is not your money — it sits in your account until you send it on. Payments are due monthly by the 22nd if you pay electronically (the 19th if you still pay by post), covering the tax month that ran to the 5th.

Smaller employers can apply to pay quarterly instead, which suits a firm with one employee and lumpy cash flow. Either way, move the money out of your working account the day you run payroll. Spending employee tax and finding it missing in month three is one of the more common ways a small firm ends up in a payment plan with HMRC.

Check whether you can claim the Employment Allowance, which reduces your employer National Insurance bill. Most small employers qualify, and your payroll software will claim it if you tell it to. Your accountant can confirm whether you are eligible.

Step six: sort the workplace pension

Auto-enrolment applies from the day you employ someone. You must assess whether they qualify, and if they do, put them into a qualifying pension scheme and contribute.

Broadly, an employee aged 22 or over, under State Pension age and earning above the earnings trigger must be enrolled automatically. Minimum total contributions are currently 8% of qualifying earnings, of which at least 3% must come from you. Confirm the current thresholds and rates on the Pensions Regulator’s site before you set the scheme up — they are reviewed annually.

You will also need to complete a declaration of compliance with the Pensions Regulator, and re-enrol eligible staff roughly every three years. Set the scheme up in good time — providers like Nest are used to one-person payrolls, but nothing is instant.

Step seven: employers’ liability insurance

The moment you have an employee you must hold employers’ liability insurance with at least £5 million of cover from an authorised insurer, and display or make available the certificate. This is a legal requirement, enforced by the HSE, and it is separate from your public liability cover. Ring your broker before the start date, not after.

What it looks like in practice

A two-man plumbing firm in Kent taking on an apprentice runs the sequence like this: register as an employer six weeks out, sort the pension scheme and employers’ liability while waiting for the PAYE reference, get the contract and starter details signed on day one, and run the first payroll the day before the first Friday. After that it is a fifteen-minute job each week — check hours, run payroll, file the FPS, send the payslip, move the tax money across.

Where the work comes from

Payroll only makes sense when the diary justifies a second pair of hands. Trade Pilot is free to join and only charges when a real local job lands in your inbox — and each lead is sold to no more than three trades in the area, so you are not bidding against a dozen firms for the same kitchen. No monthly fee to carry while you are building up the work.

FAQs

Do I have to register for PAYE if my employee earns very little? You still need to register as an employer in most cases, but if none of your employees earns above the lower earnings limit, has another job, or gets a pension or benefits, you may not need to run a full PAYE scheme. You must still keep payroll records. Check your specific situation with an accountant.

Can I pay my first employee cash in hand? No. Every payment must go through payroll, be reported to HMRC on or before payday, and be supported by a payslip. Paying off the books exposes you to back taxes, penalties and, if there is an accident, a very awkward insurance claim.

How is this different from paying a subcontractor under CIS? CIS is a deduction scheme for self-employed subcontractors in construction — you verify them with HMRC, deduct 20% or 30% from the labour element, and file a monthly CIS return. PAYE is for employees and covers income tax, National Insurance, pension and statutory rights such as holiday and sick pay. They are separate systems and you may run both.

Do I need to pay holiday pay from day one? Yes. Statutory holiday entitlement builds up from the first day of employment, including for part-time and irregular-hours staff. Your payroll software or accountant can help you work out the entitlement for the hours actually worked.

What happens if I file the FPS late? HMRC can charge a penalty for each late submission, rising with the number of employees and the number of defaults in a tax year. First-time lateness is often treated leniently, but repeated late filing is not. If a payment is going to be late or an employee leaves mid-period, tell your software — there are correct ways to report it.

Should I just get an accountant to run payroll? For one or two employees it is often the pragmatic choice. A bureau or accountant will handle registration, filings, payslips and year-end for a small monthly fee, and takes the deadline risk off your plate. Weigh that against the hours you would otherwise spend on it.

Related reading: holiday pay and sick pay · employers' liability insurance · taking on an apprentice · subcontractor vs employee