Hiring your first employee means a step in the right direction for growth, but it also means you are now responsible for paying someone correctly, on time and in line with HMRC rules. The good news is that payroll for employees, starting with just one person, is far more manageable than most business owners expect, provided you set it up properly from day one.
This guide walks through how to set up payroll for one employee in the UK, with figures for the 2026/27 tax year, a comparison of what it costs to do it yourself or outsource it, and the deadlines to put in your diary. It also covers the common case where the only employee is you, as a company director.
What does payroll for employees involve?
Payroll is the process of paying your employee and reporting that payment to HMRC. Each time you pay them you need to:
- Work out their gross pay
- Deduct Income Tax and employee National Insurance through PAYE
- Deduct any pension contributions
- Calculate the employer National Insurance you owe
- Give them a payslip
- Report everything to HMRC and pay over what is due.
That last step is where first-time employers most often go wrong, so it is worth understanding before your employee starts.
Step 1: Check the person is an employee
Not everyone you pay is an employee.
A self-employed contractor invoices you and manages their own tax, whereas an employee is paid through your payroll. Getting this wrong can lead to back-dated tax and National Insurance, so if you are unsure, check before you hire.
The same applies to the construction industry, where different rules (CIS) may apply.
Step 2: Register as an employer with HMRC
Before you can run payroll for employees, you need to register as an employer and set up a PAYE scheme with HMRC. HMRC will then issue your PAYE reference and Accounts Office reference, which you will need for every payroll submission.
HMRC lets you register up to two months before the first payday, but no earlier. The references arrive by post and can take anywhere from about five to fifteen working days, so a safe window is four to six weeks before you plan to pay anyone. If they have not arrived by payday, GOV.UK sets out a workaround that involves phoning HMRC’s employer helpline.
Two references matter when doing payroll for employees as an employer. These are your Employer PAYE reference, which identifies your PAYE scheme and appears on your payroll records, and your Accounts Office reference, the one you quote when paying HMRC. Many people searching for their “HMRC payroll reference number” are looking for the first of these.
Step 3: Complete your legal checks and paperwork
Before day one, you must:
- Check their right to work in the UK: This is a legal requirement for every new employee and getting it wrong can result in substantial civil penalties
- Provide a written statement of employment particulars covering pay, hours and other key terms, on or before their first day
- Take out employers’ liability insurance: This is compulsory for most employers, with at least £5 million of cover
- Check you will pay at least the minimum wage: Announced in the Autumn Budget 2026, the National Living Wage will be increasing to £13.21 per hour from April 2027. Currently, from 1st April 2026, it remains £12.71 an hour for those aged 21 and over, £10.85 for 18- to 20-year-olds, and £8.00 for under 18s and apprentices. Always check this on the Government website before paying employees.
Step 4: Collect your employee’s details
You will need their full name, date of birth, address, National Insurance number, start date and bank details. You also need to know their tax code.
This usually comes from a P45 from their previous employer. If they do not have one, ask them to complete a HMRC starter checklist, which tells you which tax code to start with.
Step 5: Choose how you will run your payroll
You have three realistic options:
- Do it yourself using HMRC-recognised payroll software, or HMRC’s free Basic PAYE Tools if you employ fewer than ten people. Bear in mind that Basic PAYE Tools does not produce payslips or work out pension contributions
- Use your accountant. Many small businesses prefer to hand payroll for employees to a specialist so they know the calculations, submissions and deadlines are handled correctly
- Use a payroll bureau if you want payroll alone, separate from your wider accounts.
Doing it yourself saves money on paper, but remember that you are responsible for any mistakes, penalties and late filings. For one employee, the time saved by outsourcing often outweighs the cost.
Our payroll team at Tax Driven Accountants can set up your PAYE scheme, process each pay run and handle your HMRC submissions for you.
What does payroll for one employee cost?
These are indicative UK figures as of October 2026. Prices vary by provider and by what is included.
| Option | Typical cost | Additional information |
| HMRC Basic PAYE tools | Free | No payslips and no pension calculations, so you need a way to produce both |
| Payroll software | Roughly £5 to £40 a month for one employee, depending on the package | You still do the work and carry the responsibility for errors |
| Payroll bureau or accountant | About £4 to £10 per employee per month, sometimes with a base fee of £20 to £50 | Payroll only, separate from your accounts |
Step 6: Work out what to pay and what to deduct
Here are the main 2026/27 figures you need for employee payroll:
| Item | 2026/27 figure |
| Personal Allowance (tax code 1257L) | £12,570 a year |
| Income Tax (basic rate) | 20% |
| Employee National Insurance | 8% on earnings above £12,570 a year (£1,048 a month) |
| Employer National Insurance | 15% on earnings above £5,000 a year (£417 a month) |
| Auto-enrolment earnings trigger | £10,000 a year |
| Minimum pension contribution | 8% of qualifying earnings (at least 3% from you – the employer) |
Could you claim the Employment Allowance?
Many small employers can claim the Employment Allowance, which reduces your employer National Insurance bill by up to £10,500 a year. There are exceptions, though, as you can’t claim it if you employ someone for personal or household work (a nanny, for example), and a company where the director is the only person paid above the secondary threshold is also excluded.
You claim it through your Employer Payment Summary (EPS), and you should check eligibility before you rely on it.
Step 7: Set up workplace pension auto-enrolment
Once you employ someone, you take on automatic enrolment duties:
- Employees aged 22 up to State Pension age who earn over £10,000 a year must be automatically enrolled into a workplace pension
- Those earning between £6,240 and £10,000 can ask to join and you must pay employer contributions
- Minimum total contributions are 8% of qualifying earnings, with at least 3% from you, the employer
- You must choose a qualifying pension scheme, write to your employee about their enrolment, and complete your declaration of compliance with The Pensions Regulator within five months of your duties starting.
Even if your employee is not eligible to be enrolled, you still need to assess them and keep records.
Step 8: Run your first payroll for employees
On or before the day you pay your employee, you must send HMRC a Full Payment Submission (FPS) through your payroll software. This is how HMRC learns what you have paid and what has been deducted. Give your employee a payslip showing their gross pay, deductions and net pay.
You then pay the Income Tax, employee National Insurance and employer National Insurance you owe to HMRC. Electronic payments are due by the 22nd of the month after the tax month in which you paid your employee. If your average monthly bill is under £1,500, you can ask HMRC to let you pay quarterly instead.
How often you pay is set by your employee’s contract. Monthly pay means 12 pay runs a year, four-weekly pay means 13 and weekly pay means 52.
What if the only employee is you?
Many people searching for payroll for one employee are company directors paying themselves a salary. If that is you, the same rules apply.
A director is treated as an office holder for PAYE, so in most cases you still need to register as an employer, run payroll, send an FPS and produce a payslip, even though you are the only person on it.
The Employment Allowance is where directors are most often caught out. If the director is the only employee and is paid above the £5,000 secondary threshold, the company cannot claim it.
How much salary to take, and how that interacts with dividends and your personal tax return, is a separate decision, and one we can help with, through our business taxation services.
See our guide to tax returns for company directors for more insight.
Frequently asked questions about payroll for employees
Can I do my own payroll in the UK?
Yes. As an employer you can run payroll for employees yourself using HMRC-recognised software, as long as you submit on time and calculate everything correctly. Many small business owners choose to outsource payroll for employees because it saves time and removes the risk of costly errors.
Is a payroll number the same as an employee number?
Not necessarily. A payroll number is the unique reference you give an employee in your payroll system, and it appears on their payslip and P60. An employee number is usually an internal reference used by the business. In small businesses the two are often the same, but they do not have to be. Your payroll software sends a payroll ID to HMRC with each submission, so every employee should have a unique one, and it should not be reused when someone leaves.
How long does payroll take to process?
Estimates suggest UK businesses spend around two and a half hours a month on payroll. For one employee it is often well under that once set up but allow longer for the first few runs and for year-end.
Need help with payroll for employees?
Getting payroll right from the start saves you stress, penalties and time. At Tax Driven Accountants, we can register you as an employer, set up your PAYE scheme, run payroll for employees every pay period and keep you on top of every HMRC deadline.
Get in touch with Tax Driven Accountants today, call us on 0800 999 1800 or send us an enquiry to get the support you need.
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This guide is for general information only and reflects rates and thresholds for the 2026/27 tax year. It does not constitute personal advice.
