Tax Considerations When Hiring Your First Employee
Hiring your first employee marks a significant milestone for any business. It signals growth, ambition, and the need for additional support to scale operations. However, it also introduces new legal and financial responsibilities, particularly around tax, National Insurance, payroll compliance, and employment-related costs. Getting this right from the start helps avoid HMRC penalties, unexpected bills, and compliance headaches.
At Jan McDermott Chartered Accountants in Birkenhead, Wirral, we specialise in supporting small businesses, start-ups, and growing companies across Merseyside and beyond. Our team provides expert payroll setup, tax advice, and ongoing compliance support, helping business owners navigate employer responsibilities with confidence while keeping costs under control. Whether you operate as a sole trader moving to limited company status or are already incorporated, we act as your virtual finance department so you can focus on growing your business.
This guide outlines the key tax considerations when hiring your first employee in the UK, current rules for the 2026/27 tax year and beyond, and practical steps to ensure smooth compliance.
1. Register as an Employer with HMRC
Before paying your first employee, you must register as an employer with HM Revenue & Customs (HMRC). This gives you a PAYE (Pay As You Earn) reference number and sets up your account for reporting and paying taxes.
- Register online via GOV.UK ideally before the first payday (you cannot register more than two months in advance).
- You will need details about your business and the employee.
- Late registration can result in penalties.
Once registered, you must operate a payroll system that reports to HMRC in real time via Full Payment Submissions (FPS) every time you pay an employee.
Pro Tip: Many small businesses use HMRC-approved payroll software or outsource to specialists like Jan McDermott Chartered Accountants to avoid errors and save time.
2. Understand Income Tax and National Insurance Contributions (NIC)
As an employer, you deduct taxes from your employee’s pay and pay additional employer contributions.
Employee Deductions (2026/27):
- Income Tax: Deducted via PAYE based on the employee’s tax code (usually 1257L for standard personal allowance of £12,570).
- Employee National Insurance: 8% on earnings between the Primary Threshold and Upper Earnings Limit, then 2% above.
Employer Contributions:
- Employer Class 1 NIC: Currently 15% on earnings above the Secondary Threshold of £5,000 in recent. This significantly increases the cost of employment.
- No Employer NIC on earnings below the threshold, offering some relief for lower-paid roles.
These contributions are paid monthly to HMRC alongside deducted tax and employee NIC.
3. Employment Allowance
Eligible employers can claim the Employment Allowance, which reduces your annual Employer NIC bill.
- For 2025/26, the allowance is £10,500.
- Most small businesses with an annual Employer NIC liability under this amount can reduce their bill to zero.
- Restrictions apply: Not available to sole director companies where the director is the only employee, or certain connected companies.
We help clients check eligibility and claim correctly to maximise savings.
4. National Minimum Wage / Living Wage and Statutory Payments
You must pay at least the National Minimum Wage (or National Living Wage for employees 21+). Rates are reviewed annually, (typically each April) so factor this into budgeting.
Other potential costs include:
- Statutory Sick Pay (SSP)
- Statutory Maternity, Paternity, Adoption, or Shared Parental Pay
- Holiday pay (minimum 5.6 weeks per year)
Some statutory payments can be recovered from HMRC:
- Employers can usually reclaim 92% of statutory maternity, paternity, adoption, and shared parental pay (or up to 109% if eligible for Small Employers’ Relief)
- Statutory Sick Pay cannot be reclaimed and must be fully funded by the employer
Accurate payroll processing and record keeping are essential to ensure correct claims and compliance.
5. Auto-Enrolment Pension Obligations
If your employee earns more than £10,000 per year (and meets other criteria), you must enrol them into a workplace pension scheme.
- Minimum contribution: 3% employer, 5% employee (total 8%).
- You must choose a qualifying scheme and register with The Pensions Regulator.
Missing auto-enrolment deadlines can lead to fines. Our team can guide you through setup and ongoing compliance.
6. Payroll Setup and Record-Keeping
You need to:
- Collect employee details (NI number, P45/P46, starter checklist, right to work checks).
- Choose compliant payroll software (or use our payroll service).
- Keep detailed records for at least 6 years (or 4 years for some pension records).
Real-time information (RTI) reporting is mandatory. Errors in submissions can trigger enquiries from HMRC.
7. IR35 and Off-Payroll Working Rules
If you are considering hiring a contractor instead of (or before) an employee, understand the off-payroll working (IR35) rules. From April 2026, thresholds for defining “small” companies are increasing, which may shift responsibility back to contractors in more cases.
For genuine employees, these rules do not apply but misclassifying a worker can lead to back taxes and penalties. We can assist with IR35 reviews and status determinations where needed.
8. Other Tax and Compliance Considerations
- CIS (Construction Industry Scheme): If your business operates in construction, you may need to register as a contractor and make deductions from subcontractors.
- Benefits in Kind: Company cars, private medical insurance, or other perks have tax implications (currently reported via P11D).
- VAT: If your turnover exceeds the VAT threshold of £90,000 in any rolling 12-month period you must register and comply with ongoing reporting requirements.
- Corporation Tax Relief: Employer NIC and pension contributions are generally deductible business expenses.
Common Pitfalls to Avoid
- Underestimating total employment costs (1typically 15-20% on top of gross salary).
- Failing to register as an employer on time.
- Incorrect tax code or NI calculations.
- Missing auto-enrolment or right-to-work checks.
- Poor record-keeping leading to HMRC investigations.
Hiring your first employee is exciting but complex. Professional support prevents costly mistakes.
How Jan McDermott Chartered Accountants Can Help
At Jan McDermott Chartered Accountants, we support businesses at every stage of growth from start-ups to established SMEs. Our services include:
- Payroll setup and ongoing processing
- Auto-enrolment compliance
- Employer registration guidance
- Tax planning to minimise employment costs legally
- Xero implementation for seamless real-time financial visibility
- Virtual FD support for budgeting and forecasting staff costs
We offer tailored, fixed-fee packages where possible, proactive advice, and responsive service. Many clients use us as their complete outsourced finance function, freeing them to focus on operations and growth.
Our experienced team, led by Jan McArd FCA BFP, understands the challenges faced by growing businesses in Wirral, Merseyside, and across the UK. With cloud-based tools and clear communication, we make compliance straightforward.
Conclusion: Plan Ahead for Successful Hiring
Hiring your first employee brings new opportunities and new tax responsibilities. By understanding PAYE, National Insurance, Employment Allowance, pensions, and reporting requirements, you can budget effectively and stay compliant from day one.
Don’t navigate these complexities alone. Early expert advice can save time, reduce stress, and often deliver significant tax savings.
If you are preparing to hire your first employee or reviewing your current payroll arrangements, contact Jan McDermott Chartered Accountants today. We provide clear, practical guidance tailored to your business, helping you grow with confidence while staying fully compliant.