9. September 2026

Hiring Your First Employee: Payroll and Cost Considerations

Article written by PR Accountants LTD in the category Payroll

Hiring your first employee can increase capacity, improve service and create room for growth. It also turns your business into an employer, with payroll, pension, employment law and cash flow responsibilities that begin before the first payday. This guide explains the true cost of a first hire, the 2026/27 payroll rules to consider and the practical steps UK business owners should take before making an offer.

Hiring your first employee is a major milestone. It often means the business has reached the point where the owner can no longer do everything alone, customer demand is increasing or specialist support is needed to move the company forward.

The opportunity can be significant. The right person may free the owner to focus on sales, improve turnaround times, strengthen customer service or add skills that the business does not currently have.

However, the financial commitment is wider than the salary shown in the job advert. Employer National Insurance, workplace pension contributions, paid leave, payroll administration, insurance, equipment, training and management time all affect the real cost. There are also deadlines and legal duties that apply from the employee's first day, and in some cases before they begin work.

This guide explains what UK business owners should consider when hiring their first employee in the 2026/27 tax year. It is written for owner-managed businesses and limited company directors, but many of the principles apply equally to sole traders and partnerships becoming employers for the first time.

Rates and thresholds: The figures in this article are based on the 2026/27 tax year and were reviewed on 26 August 2026. Payroll, pension and employment rules can change, so check the position that applies when the employee starts.

Start with the business case, not the job title

Before calculating payroll, establish why the role is needed and what commercial result it should produce.

A first employee might be expected to:

deliver chargeable work;
create additional sales;
increase the number of customers the business can serve;
reduce delays or missed opportunities;
take over administration so the owner can focus on higher-value work;
provide technical, marketing or operational expertise; or
improve continuity by reducing reliance on one person.

Turn those expectations into measurable outcomes. For example, decide how many additional jobs must be completed, how much owner time should be released or what level of customer retention the role should support.

This matters because an employee is usually a recurring fixed cost. Their pay continues during quieter periods, annual leave, training and much of their sickness absence. A temporary increase in workload may be better handled through overtime, process improvements, outsourcing or a genuine short-term contractor arrangement. Sustained demand and a clear return on the role are stronger reasons to employ someone.

Useful questions include:

Is the demand recurring or temporary?
Is the work profitable at current prices?
Does the business have enough cash to fund recruitment and the employee's first few months?
Will the new person generate revenue directly, support revenue generation or reduce an existing cost?
Who will train, supervise and review them?
What happens if sales fall below forecast?
Could the role begin part-time without undermining the business objective?

A realistic role budget should be prepared before the salary is advertised. Starting with an attractive salary and trying to make the numbers work afterwards is a common route to pressure on cash flow and margins.

Employee or self-employed contractor?

Some businesses assume that calling someone self-employed removes the need to operate payroll. The label used in an agreement or on an invoice does not decide employment status. The actual working relationship matters.

Factors can include:

who controls what work is done and how, when and where it is performed;
whether the individual must provide the service personally;
whether there is a genuine right of substitution;
whether the business must offer work and the individual must accept it;
how integrated the person is into the organisation;
who supplies equipment and bears financial risk; and
whether the individual is genuinely operating an independent business.

Tax status and employment-law status are related but not identical. A person may also have worker rights even where they are not an employee. Getting the position wrong can lead to arrears of PAYE and National Insurance, interest, penalties and claims for employment rights.

HMRC's Check Employment Status for Tax service can help assess the tax position. HMRC says it will stand by a CEST result where the information supplied remains accurate and follows its guidance. Keep the answers and result with the engagement records. Complex or borderline arrangements should be reviewed professionally.

Do not use self-employment simply as a payroll-saving device. If the role is permanent, personally performed, controlled by the business and integrated into its operations, employment is likely to require serious consideration.

Salary is only the starting point

The full cost of a first employee can include:

gross salary, wages, overtime, bonuses and commission;
employer's National Insurance contributions;
employer workplace pension contributions;
recruitment advertising or agency fees;
payroll software or a managed payroll service;
employer's liability and other insurance;
laptop, telephone, software licences, furniture, tools, uniform or protective equipment;
initial and continuing training;
holiday pay and the operational cost of covering paid leave;
statutory sick pay and other statutory payments;
employee benefits and any associated tax reporting or Class 1A National Insurance;
travel, workplace and homeworking costs;
HR, legal and health and safety support;
management and supervision time;
reduced productivity while the employee learns the role; and
future notice, redundancy and exit costs where applicable.

Some of these costs are one-off, some vary with activity and others recur every month. Separating them makes the forecast more useful.

The salary is a contractual cost. Employer National Insurance and pension contributions are payroll on-costs. Equipment and recruitment are setup costs. Training, software, insurance and management support are continuing overheads. The business may also need a contingency for absence, overtime or temporary cover.

National Minimum Wage from April 2026

The employee must be paid at least the applicable National Minimum Wage or National Living Wage for every relevant pay reference period.

From 1 April 2026, the headline hourly rates are:

£12.71 for workers aged 21 and over;
£10.85 for workers aged 18 to 20;
£8.00 for workers under 18; and
£8.00 for an apprentice aged under 19, or aged 19 or over and in the first year of the apprenticeship.

An apprentice aged 19 or over who has completed the first year of the apprenticeship is normally entitled to the rate for their age.

Do not check compliance only when the contract is signed. The relevant rate can change when the employee has a birthday and when the national rates increase. Working time, unpaid additional hours and certain deductions can also affect the calculation. Salary sacrifice must not reduce cash pay below the legal minimum.

For example, a £30,000 annual salary based on 37.5 hours a week is approximately £15.38 an hour before considering the detailed salaried-hours rules. It is above the 2026/27 rate for a worker aged 21 or over on those assumptions. If the employee regularly works materially more hours than the contract anticipates, the business should recheck the minimum-wage calculation rather than relying on the annual salary alone.

Current rates and categories are available on the National Minimum Wage rates page.

Employer's National Insurance in 2026/27

For a typical adult employee in 2026/27, the employer's Class 1 National Insurance rate is 15% on earnings above the secondary threshold.

The standard secondary threshold is:

£5,000 a year;
£417 a month; or
£96 a week.

Thresholds and reliefs can vary for categories such as employees under 21, qualifying apprentices under 25, eligible veterans and certain employees working in a Freeport or Investment Zone. Payroll software needs the correct National Insurance category letter.

For a standard category employee earning £30,000 a year, the annual employer National Insurance estimate is:

£30,000 less £5,000 = £25,000

£25,000 at 15% = £3,750

This is a cost to the employer. It is separate from the employee's National Insurance, which is deducted from the employee's gross pay through payroll.

The full 2026/27 figures are set out in HMRC's rates and thresholds for employers.

Could Employment Allowance reduce the cost?

Eligible employers can use Employment Allowance to reduce their annual employer Class 1 National Insurance liability by up to £10,500 in 2026/27.

This can make a significant difference to the cost of a first employee, but eligibility should be checked rather than assumed.

A company cannot normally claim where its only employee liable for employer Class 1 National Insurance is also the sole director. Hiring a non-director employee above the relevant threshold may mean the company becomes eligible, provided the other conditions are met. Restrictions can apply to certain businesses and public bodies, employees working on personal or household services, and companies within connected groups. Only one company in a connected group can generally claim.

The allowance is claimed through the employer payment summary and is set against eligible employer National Insurance as liabilities arise. If the allowance covers the £3,750 in the worked example below, the immediate employer National Insurance cost could be reduced to nil. That does not mean every first-time employer will qualify, and a budget should show both the gross liability and the expected allowance separately.

Review Employment Allowance eligibility before claiming and retain evidence supporting the decision.

Workplace pension duties begin with the first member of staff

Automatic enrolment duties begin when the first member of staff starts work. They do not wait until the business has several employees.

For 2026/27, a worker will normally need to be automatically enrolled if they:

are aged at least 22 but below State Pension age;
ordinarily work in the UK; and
earn more than £10,000 a year, or the equivalent for their pay period.

Other workers may have the right to opt in or join a pension scheme, and the employer may have to contribute for some of them. The assessment must therefore cover every worker, not just those who obviously meet all three automatic-enrolment tests.

Under the common qualifying-earnings basis, minimum total contributions are 8%, with at least 3% paid by the employer. The 2026/27 qualifying-earnings band is £6,240 to £50,270 a year.

For an employee earning £30,000, the minimum employer contribution on that basis is estimated as follows:

£30,000 less £6,240 = £23,760 of qualifying earnings

£23,760 at 3% = £712.80 a year

Different pension certification bases can apply. A business may also choose to contribute more than the statutory minimum. Scheme charges, payroll integration and the timing of contribution payments should form part of the setup decision.

The employer must usually write to staff about how automatic enrolment affects them within six weeks of the duties start date and submit a declaration of compliance to The Pensions Regulator within five months. The declaration is required even if nobody needs to be automatically enrolled. Eligibility must then be monitored as ages and earnings change.

An employer must not encourage an employee to opt out. A valid opt-out is handled under the pension scheme's process, and the employer still has ongoing assessment and re-enrolment duties.

See The Pensions Regulator's guidance on duties for new employers and earnings thresholds.

Worked example: the direct cost of a £30,000 employee

Assume a limited company hires one employee who is aged 21 or over on a salary of £30,000. The employee is in the standard National Insurance category, is enrolled in a qualifying-earnings pension scheme, and the company makes only the statutory minimum employer pension contribution.

The estimated direct annual payroll cost is:

gross salary: £30,000;
employer's National Insurance: £3,750; and
minimum employer pension contribution: £712.80.

Estimated direct annual payroll cost: £34,462.80

This is about £2,871.90 a month on an annualised basis, although actual payroll liabilities can vary by pay period because payroll uses period thresholds and rounding.

The estimate excludes recruitment, equipment, benefits, software, insurance, training, payroll support, overtime, absence cover and management time. If these add £5,000 in the first year, the indicative first-year employment cost becomes £39,462.80.

If the company qualifies for Employment Allowance and has sufficient unused allowance, it may offset the £3,750 employer National Insurance liability. In that case, the net first-year cost could be lower. Eligibility and timing must be confirmed, and the role should not be made commercially viable only by assuming that a relief will always remain available.

The employee's PAYE income tax, employee National Insurance and employee pension contributions are not additional employer costs. They are withheld from gross pay. However, the employer is responsible for calculating, reporting and paying the correct amounts, so they create an important cash-handling and compliance responsibility.

Paid holiday is both a legal right and a capacity cost

Almost all workers are entitled to 5.6 weeks of paid holiday each leave year. For someone working five days a week, this is normally 28 days. Bank holidays can be included within that entitlement if the employment terms provide for it.

For a fixed-salary employee, statutory holiday pay is already part of the annual salary rather than an extra 5.6 weeks added on top. The commercial cost is that the employee is paid while not producing work. The business must decide whether deadlines can be rescheduled, colleagues can absorb the work or temporary cover is needed.

Part-time staff receive a pro-rata entitlement. Separate accrual and holiday-pay rules apply to irregular-hours and part-year workers. Rolled-up holiday pay is permitted only in defined circumstances and must follow the current rules, including itemisation. It should not be used as a general shortcut for ordinary fixed-hours employees.

Holiday continues to accrue during certain other types of leave, including sickness and family leave. A proper leave-year definition, request procedure, carry-forward policy and recording process should be in place from the start.

See the government's holiday entitlement guidance and use its calculator where working patterns are not straightforward.

Statutory Sick Pay changed from April 2026

From 6 April 2026, Statutory Sick Pay is available from the first full qualifying day of sickness, and the previous lower earnings limit has been removed.

For 2026/27, the weekly rate is the lower of:

80% of the employee's average weekly earnings; and
£123.25.

Eligibility and average weekly earnings still need to be assessed correctly. The employment contract may provide occupational sick pay that is more generous than the statutory amount. Employers generally fund Statutory Sick Pay themselves under current rules, so absence should be included in the cash flow contingency.

Maintain an absence-reporting procedure and accurate sickness records. Current calculation guidance is available from HMRC at manually calculate Statutory Sick Pay.

Family leave and other statutory payments

A first employee can become entitled to maternity, paternity, adoption, shared parental, parental bereavement or neonatal care leave and pay if the relevant conditions are met. Some rights relate to length of service, while others apply from the beginning of employment.

For 2026/27, the standard weekly rate for several statutory family payments is £194.32 or 90% of average weekly earnings if lower. Statutory Maternity Pay is normally 90% of average weekly earnings for the first six weeks, followed by the standard rate or 90% of average weekly earnings if lower.

Eligible employers can usually recover most statutory family payments from HMRC, and qualifying small employers may recover more. Recovery affects the final cost, but the business may still need to fund payments through payroll before relief is obtained. Payroll software and records must deal with eligibility, notices, evidence and recovery correctly.

Benefits, expenses, bonuses and overtime

The contract and budget should state what the employee can expect beyond basic salary.

A bonus or commission scheme needs clear, objective terms. Consider whether payments are contractual or discretionary, what happens when employment ends, how refunds or cancellations affect commission and whether bonuses count for holiday-pay purposes.

Overtime should be authorised and recorded. Even where overtime is unpaid under the contract, total pay must remain compliant with minimum-wage rules and working-time requirements.

Benefits such as private medical insurance, a company car, beneficial loans or non-business expenses may create taxable benefits and employer Class 1A National Insurance. They may need to be payrolled or reported on form P11D. Reimbursed business expenses should follow HMRC rules and the company's expense policy.

Benefits can improve recruitment, but their tax and administration should be established before they are promised.

Registering as an employer and setting up PAYE

Most businesses must register with HMRC as an employer before the first payday, even where the only employee is a director. Registration cannot normally be completed more than two months before the business starts paying people.

Allow enough time to receive the PAYE reference details and configure payroll. The setup process normally includes:

Choosing the pay frequency and contractual payday.
Registering as an employer with HMRC.
Selecting payroll software or appointing a payroll provider.
Collecting starter information, including a P45 where available or a completed starter checklist.
Verifying personal details, address, date of birth and National Insurance number where available.
Applying the correct tax code, student or postgraduate loan status and National Insurance category.
Assessing pension duties.
Recording gross pay, deductions and employer liabilities.
Giving the employee an itemised payslip on or before payday.
Reporting the payment to HMRC through Real Time Information.

HMRC says an employer should register before the first payday, but no more than two months before it starts paying people.

Real Time Information and payment deadlines

Each time the employee is paid, the employer normally submits a Full Payment Submission to HMRC on or before payday. The first submission tells HMRC about the new employee.

An Employer Payment Summary may also be needed, for example to claim Employment Allowance, report no employee payments in a tax month or recover statutory payments.

PAYE tax, employee National Insurance, employer National Insurance, student-loan deductions and other amounts due are usually payable to HMRC by:

the 22nd after the end of the tax month when paying electronically; or
the 19th when paying by post.

An employer whose average monthly liability is less than £1,500 may be able to arrange quarterly payments, but Real Time Information reports are still submitted according to the normal payroll dates. Confirm the arrangement with HMRC before relying on quarterly payment dates.

Amounts deducted from employees should be treated as money due to HMRC, not as spare working capital. A separate payroll liabilities account or cash allocation can help prevent a shortage when payment falls due.

HMRC's guidance explains reporting to HMRC and paying PAYE.

Payroll records must be complete and secure

Employers must keep payroll records for at least three years from the end of the tax year to which they relate. Records commonly include:

amounts paid and deductions made;
reports and payments made to HMRC;
tax codes and starter information;
employee leave and sickness absences;
statutory payments;
benefits and expenses;
pension assessments and contributions; and
notices and relevant correspondence.

Payroll records contain personal and financial information. Access should be limited, files should be stored securely and the business should follow data-protection requirements. If a payroll provider processes the data, the employer remains responsible for choosing an appropriate provider and maintaining suitable arrangements.

See HMRC's list of PAYE records employers must keep.

Employment documents and checks before the start date

Payroll is only one part of becoming an employer. The onboarding process should also cover the following areas.

A lawful and consistent recruitment process

Job adverts, interviews and selection decisions should be based on the requirements of the role and should avoid unlawful discrimination. Keep clear notes explaining the objective reasons for the appointment.

If the role requires a criminal-record check, professional qualification, driving licence or regulatory approval, identify the correct check before making an unconditional offer.

Right-to-work check

Complete the prescribed right-to-work check before employment begins. The correct process may involve an online share code, acceptable original documents or an approved identity service, depending on the applicant's status.

Keep evidence of the check and note whether a follow-up check is required. Apply the process consistently to all candidates to avoid discriminatory assumptions. The current process is explained in the government's right-to-work guidance.

Employment contract and written statement

An employee or worker must receive the principal written statement of employment particulars on the first day. The wider written statement must be provided within two months.

The documents should address the matters required by law, including:

the parties, job title or description and start date;
pay and pay frequency;
hours, working days and how they may vary;
holiday entitlement and whether it includes bank holidays;
place of work and any relocation or homeworking terms;
probation and its conditions;
benefits and obligatory training;
sick pay and procedures;
other paid leave;
notice periods;
pension arrangements; and
disciplinary and grievance procedures.

The written statement is not itself the complete employment contract. Additional provisions may be needed for confidentiality, intellectual property, data protection, expenses, deductions, post-termination restrictions and company property. Terms should reflect the actual arrangement and the needs of the business.

Official requirements are summarised in the written statement guidance. Employment-law advice is sensible where the role or restrictions are complex.

Employer's liability insurance

Most employers must obtain employer's liability insurance from an authorised insurer as soon as they become an employer. The policy must usually provide cover of at least £5 million.

Limited exemptions exist, but a business should not assume one applies without checking. The certificate must be accessible to employees, and the business should keep historic records in case a claim arises later. See the government's employer's liability insurance guidance.

Health and safety

Health and safety duties apply from the first employee. Assess workplace risks, take proportionate precautions, provide information and training, arrange appropriate first-aid provision and display the health and safety law poster or give the employee the equivalent leaflet.

A written health and safety policy is generally required when the business has five or more employees, but a business with one employee still has to manage risk. Homeworking and display-screen risks should be considered where relevant. The Health and Safety Executive provides a practical small-business guide.

What happens on the first payday?

Before processing the first pay run, confirm:

the employee's starter details are complete;
the tax code and National Insurance category are reasonable;
salary, hours, overtime, expenses and any deductions have been authorised;
minimum-wage compliance has been checked;
the pension assessment has been completed;
the correct contractual payday is being used;
the payslip is ready;
the Full Payment Submission can be sent on or before payday; and
sufficient cash is available for net pay, pension contributions and HMRC liabilities.

Review the payroll report before the bank payment is released. A simple reasonableness check can identify duplicate pay, an incorrect tax code, missing overtime or a wrongly selected National Insurance category.

After payday, reconcile the net-pay transfer to the payroll report, record the PAYE and pension liabilities in the accounts, and diarise the payment deadlines. Payroll should also be reconciled to the general ledger so management accounts show the true employment cost.

Building the employment cost into cash flow

Profit and cash are not the same. Payroll is time-sensitive and usually cannot be delayed merely because a customer pays late.

A useful first-hire forecast should include:

the recruitment and setup period;
the first salary payment;
monthly PAYE and National Insurance;
pension contribution dates;
annual or monthly software and insurance charges;
equipment purchases;
training and lower initial productivity;
paid leave and absence cover;
quieter trading months;
VAT and Corporation Tax falling due at the same time; and
a contingency for unexpected costs.

Run at least three scenarios: expected sales, a realistic downside and a delayed-start or slow-ramp case. Consider how long the business could retain the employee if new revenue arrives later than planned.

A healthy cash reserve gives the new hire time to become productive. It also prevents the owner from using money reserved for VAT, PAYE or Corporation Tax to meet wages.

Calculate the revenue the role must support

Revenue alone does not pay for an employee. The role must generate or protect enough contribution after the variable costs of delivering that revenue.

Suppose the first-year employment cost is £39,462.80 after adding £5,000 of recruitment, equipment, software, training and related costs to the direct payroll estimate. If the business earns a 40% contribution margin on additional sales, the revenue needed to cover the role is approximately:

£39,462.80 divided by 40% = £98,657

At a 30% contribution margin, the required revenue would be about £131,543. At a 50% margin, it would be about £78,926.

This calculation does not necessarily mean the employee must personally invoice that amount. An administrator may release the director to win and deliver more profitable work. A customer-service employee may reduce cancellations. An operations role may improve output across a team. The link between the role and financial benefit still needs to be credible and measured.

If prices do not provide enough contribution to cover the role, hiring faster can increase turnover while weakening profit and cash flow. Review pricing, efficiency and scope before assuming more sales will solve the problem.

Corporation Tax treatment

Salary, employer National Insurance, employer pension contributions and other genuine employment costs are generally deductible when calculating taxable business profits, subject to the normal rules and timing requirements.

Tax relief reduces the after-tax cost, but it does not make the employee free. The company must still fund gross pay and payroll liabilities when they fall due. A cost should not be incurred only because it is tax-deductible.

Wages are outside the scope of VAT, so there is no input VAT to reclaim on salary. VAT treatment for recruitment, equipment, software and professional support depends on the supplier, the expense and the business's recovery position.

Common first-employer mistakes

Budgeting only for gross salary

This ignores employer National Insurance, pension contributions, setup costs, leave, training and management time. Prepare a full first-year and continuing annual cost.

Treating an employee as self-employed without a status review

An invoice and a self-employed clause do not override the facts. Review the engagement before work starts and again if the arrangement changes.

Registering for PAYE too late

Waiting until payday risks missed Real Time Information reporting and rushed setup. Register early enough to receive the references, but no more than two months before the first payment.

Forgetting automatic enrolment

Pension duties begin with the first member of staff. Even where no employee qualifies for automatic enrolment, communications, records and the declaration of compliance may still be required.

Assuming Employment Allowance automatically applies

The allowance is valuable, but the business must meet the conditions. Review sole-director and connected-company rules and document the claim.

Checking minimum wage against annual salary only

Actual working time, the pay reference period, deductions and salary sacrifice can change the result. Recheck when hours, pay or age changes.

Missing the Full Payment Submission deadline

The Full Payment Submission is normally due on or before payday, not when HMRC receives the payment.

Spending payroll deductions

PAYE, employee National Insurance and pension deductions are liabilities. Ring-fence them so they are available by the due date.

Using a generic contract that does not match the role

Unclear hours, commission, holiday, confidentiality or homeworking terms can cause disputes. The documentation should reflect the real arrangement.

Assuming probation removes statutory rights

A probation period can support performance management, but it does not suspend minimum wage, holiday, payroll, discrimination, health and safety or other statutory protections.

Failing to monitor the commercial result

Once the employee starts, compare actual cost, capacity, revenue contribution and cash flow with the business case. A successful hire should improve the business, not merely increase turnover.

A practical first-hire checklist

Before advertising the role:

define the work, hours, location and required skills;
prepare expected, downside and cash flow scenarios;
calculate salary, employer National Insurance and pension costs;
add recruitment, equipment, software, insurance and training;
estimate the revenue or capacity needed to cover the role;
consider whether employment is the correct status; and
review minimum-wage affordability and market pay.

Before making the offer:

use a fair recruitment process;
decide whether the offer is conditional on checks;
prepare the employment contract and written particulars;
confirm holiday, sickness, benefits, notice and probation terms;
plan the right-to-work check; and
obtain HR or legal advice where needed.

Before the employee starts:

complete the right-to-work check;
arrange employer's liability insurance;
register for PAYE within the permitted timeframe;
choose and configure payroll software or appoint a provider;
choose a workplace pension and understand the duties start date;
complete risk assessments and health and safety arrangements;
set up secure personnel and payroll records;
arrange equipment, access, training and supervision; and
prepare a structured induction plan.

For the first payroll:

collect the P45 or starter checklist;
confirm tax, National Insurance and student-loan details;
check pay and working hours against minimum-wage rules;
assess pension status;
calculate gross pay, deductions and employer costs;
give an itemised payslip;
submit the Full Payment Submission on or before payday;
pay net wages on time; and
set aside the HMRC and pension liabilities.

After the employee starts:

send automatic-enrolment communications within the required period;
submit the pension declaration of compliance by the deadline;
pay HMRC and the pension scheme on time;
reconcile payroll to the accounts;
monitor leave, sickness, hours, birthdays and pay changes;
review performance and support during probation; and
compare the actual financial return with the original business case.

Frequently asked questions

Do I need a payroll scheme for one employee?

Usually, yes, where the individual is an employee and PAYE registration conditions are met. There are limited cases where an employer may not need to register, but records may still be required. Check the specific facts rather than assuming one low-paid employee is outside payroll.

When should I register as an employer?

Register before the first payday. HMRC normally does not allow registration more than two months before the business starts paying people, so build the registration into the pre-start timetable.

What is the employer National Insurance rate for 2026/27?

The standard rate is 15% above the secondary threshold, which is £5,000 a year for 2026/27. Special categories and reliefs can change the calculation.

Can a one-director company claim Employment Allowance after hiring someone?

Potentially. A company whose only employee liable for employer Class 1 National Insurance is its sole director cannot normally claim. Employing a non-director above the relevant threshold may change eligibility, subject to all the other rules. Check before submitting the claim.

How much should I add to salary for employment costs?

There is no universal percentage. Employer National Insurance, pension basis, benefits, recruitment costs, equipment, paid leave, training and cover vary. Calculate the role from its actual terms. In the worked example, a £30,000 salary creates at least £34,462.80 of direct payroll cost before the wider expenses.

Must I provide a workplace pension immediately?

Your duties begin when the first member of staff starts. Whether immediate enrolment and contributions are required depends on age and earnings, although other workers can have rights to opt in or join. A lawful postponement may defer assessment for up to three months, but it brings notice requirements and does not remove the underlying duties.

Is holiday pay an extra cost above salary?

For a fixed annual salary, holiday pay is generally included in that salary. It is still a capacity cost because the employee is paid while away from work. Hourly, irregular-hours and part-year arrangements require careful entitlement and holiday-pay calculations.

Can I outsource payroll and forget about it?

You can outsource calculation, reporting and administration, which can greatly reduce the burden. The business remains the employer and is still responsible for supplying accurate information, approving payroll, funding payments and meeting its legal duties.

What records must I keep?

Keep pay, deductions, tax codes, reports to HMRC, payments, leave, sickness, statutory payment, benefits and pension records. HMRC payroll records generally need to be retained for three years from the end of the relevant tax year, while employment, pension and insurance records may need different retention periods.

The key message

Hiring your first employee should be an investment in capacity and sustainable profit, not simply a response to feeling busy.

Start with a clear business case. Calculate the full employment cost, model the cash flow, confirm the employment status and complete the payroll, pension and legal setup before the first day. Then measure the result after the employee joins.

A £30,000 salary does not cost only £30,000. Under standard 2026/27 assumptions, employer National Insurance and the minimum employer pension contribution increase the direct annual payroll cost to approximately £34,462.80 before any wider costs. Employment Allowance may reduce the National Insurance burden for an eligible business, but it should be verified and recorded correctly.

Good preparation protects the employee, the employer and the cash flow that supports both.

How PR Accountants can help

PR Accountants can help you understand the financial and payroll implications of becoming an employer. We can support you with:

first-hire cost modelling and cash flow forecasts;
PAYE registration and payroll setup;
regular payroll processing and Real Time Information submissions;
employer National Insurance and Employment Allowance reviews;
workplace pension payroll administration;
payslips, starter and leaver processing;
payroll reconciliations and year-end reporting; and
management information to measure the commercial effect of the role.

Employment contracts, HR procedures and legal advice should be handled by a suitably qualified employment-law or HR specialist. We can work alongside your adviser so the payroll setup matches the agreed terms.

To discuss your first employee and obtain a cost forecast before making an offer, contact PR Accountants:

Telephone: 0330 043 0792
Email: info@praccounting.co.uk
Website: www.praccounting.co.uk

Official sources and further guidance

Important note

This article provides general information and is not a substitute for advice based on your circumstances. Payroll, tax, pension and employment-law treatment can vary with the worker, contract, pay arrangements and business structure. Rates and rules may change after publication.