Hiring your first employee is a milestone but it immediately triggers a set of legal obligations with HMRC and The Pensions Regulator that carry real financial penalties if missed.
Understanding how to set up PAYE correctly from day one is not optional: it is the system through which income tax and National Insurance Contributions are deducted from your employee's wages before they are paid, then reported to HMRC on every single payday.
This guide walks UK founders through each step in order registration, software, RTI submissions, and pension auto-enrolment with verified figures for the 2026/27 tax year.
Registering as an Employer with HMRC
The registration threshold changed in April 2025 to the secondary threshold: £96 per week (£417 per month or £5,000 per year, approximately $6,300 USD). You must register if any employee including yourself as a company director earns at or above this level. You must also register if an employee holds another job, receives a state or occupational pension, or receives taxable benefits from you, even if their earnings fall below the threshold.
Before you begin the form, have the following ready:
- Business name and company registration number (if a limited company)
- Full name, National Insurance number, and home address of at least one director
- Anticipated first pay date and your employer start date
- A Government Gateway account you can create one during registration
HMRC then sends two references by post. The Employer PAYE Reference identifies your PAYE scheme for all payroll reporting. The Accounts Office Reference is used to make payments to HMRC.
Both must be entered into your payroll software before your first submission and getting this step right is central to how to set up PAYE without delays on your first payday. If the references have not arrived by payday, run payroll, store the Full Payment Submission, and file it as a late FPS once the references land.
One benefit worth claiming on day one: if you qualify for the Employment Allowance, claim it on your first Employer Payment Summary. The allowance is £10,500 (approximately $13,200 USD) for 2025/26 and reduces your employer NIC bill directly. The employer NIC rate for 2026/27 is 15%, applied above the secondary threshold of £5,000 per year.
Choosing Payroll Software
Choosing the right payroll software is one of the first practical decisions a payroll small business setup requires. It determines how much of the compliance burden you carry manually versus what gets automated on every pay run. Every platform on the GOV.UK recognised software list, last updated April 2026, meets the baseline RTI requirement; the difference is in what each handles beyond that.
HMRC's own Basic PAYE Tools is free for employers with up to nine employees. It covers RTI submissions but lacks automated payslip generation, cloud storage, and pension auto-enrolment management. For a growing payroll small business that needs all three without upfront cost, Employment Hero Payroll's free tier supports unlimited employees with full RTI compliance and auto-enrolment included.
Sage Essentials starts at £20 per month (approximately $25 USD) for up to ten employees and updates automatically as Employment Rights Act 2026 changes roll out. Moneysoft is the most cost-effective paid option at approximately £90 + VAT per year (around $113 USD), with CIS support included for construction businesses.
For most founders learning how to set up PAYE for the first time, modern payroll software handles the compliance layer entirely: tax calculations, RTI filings, pension contributions, and statutory payments are all automated. A qualified accountant or payroll bureau adds value once headcount grows or benefits-in-kind reporting via P11D forms becomes a regular task.
RTI Submissions
Every time you pay an employee, you must report it to HMRC on or before payday using a Full Payment Submission understanding how to set up PAYE correctly means knowing this deadline is non-negotiable, as late FPS submissions can trigger automatic RTI penalties. Penalty amounts depend on employer size and the number of late filings during the tax year. RTI replaced the old year-end reporting model in 2013 and gives HMRC a live view of your payroll on every pay run.
Two submission types apply to every employer:
- Full Payment Submission (FPS): Filed on or before each payday weekly, fortnightly, or monthly. Covers gross pay, income tax, employee and employer NIC, student loan deductions, pension contributions, and starter or leaver information.
- Employer Payment Summary (EPS): Filed by the 19th of the following month. Used to reclaim statutory payments such as Statutory Maternity Pay, report the Employment Allowance claim, or notify HMRC of a period in which no employees were paid. If no employees are paid in a given period, submit an EPS rather than an FPS.
The total PAYE due tax deducted plus employee and employer NIC, minus any allowances or reclaims must reach HMRC by the 22nd of the following month electronically, or the 19th by cheque. If your average monthly liability is under £1,500 (approximately $1,900 USD), HMRC permits quarterly payments instead.
Late FPS penalties are automatic and scale by headcount: £100 per month for 1–9 employees, £200 for 10–49, £300 for 50–249, and £400 for 250 or more. Employers should assume that FPS submissions must be filed on or before payday and should not rely on any discretionary HMRC tolerance for late submissions. At year-end, The final FPS for the tax year must be submitted on or before the last payday of the tax year, and P60s must be issued by 31 May.
Pension Auto-Enrolment and the Deadlines That Carry Penalties
When you register as an employer with HMRC, auto-enrolment applies from your first eligible employee no minimum size, staging date, or grace period. It's commonly underestimated and carries steep penalties.
Employees qualify if aged 22 to State Pension age (66) and earn £10,000+ per year. Those earning £6,240–£10,000 can opt in; below £6,240 can join voluntarily without employer contribution.
Minimum contributions for 2026/27: 3% employer, 8% total (typically 5% employee). Contributions apply to qualifying earnings between £6,240 and £50,270 per year. NEST is the government-backed default scheme, available at no setup cost.
Key deadlines from registration:
- Within 6 weeks: Write to employees explaining auto-enrolment; notify postponement in writing if applicable.
- Within 5 months: Submit declaration of compliance to TPR confirming eligible workers are enrolled and a qualifying scheme is in place.
Missing the compliance deadline triggers a fixed £400 penalty. Continued non-compliance escalates to daily fines: £50/day for micro businesses up to £10,000/day for larger employers. Deliberately withholding employee pension contributions can lead to severe enforcement action, including prosecution in serious cases. Keep all pension records for six years.
FAQs
1. When do I need to register for PAYE?
You must register as an employer with HMRC before your first payday, but no earlier than two months in advance. HMRC takes up to 15 working days to process and post your reference numbers, so aim to register at least three to four weeks before your first planned pay date.
2. Can I run payroll myself or do I need software?
Any employer can run payroll themselves using HMRC-recognised software; you do not need a payroll specialist for a straightforward payroll small business setup. For one or two employees on a fixed monthly salary, tools like Employment Hero Payroll (free) or HMRC's Basic PAYE Tools automate tax calculations, RTI submissions, and pension contributions without any specialist knowledge.
3. What is pension auto-enrolment for startups?
Pension auto-enrolment is the legal requirement for every UK employer to enrol eligible employees aged 22 to 66 and earning over £10,000 per year into a qualifying workplace pension and contribute a minimum of 3% of their qualifying earnings. It applies from your very first hire regardless of company size, and The Pensions Regulator enforces it with penalties of up to £10,000 per day for continued non-compliance.
Conclusion
Setting up PAYE is straightforward when you know the sequence register before the first payday, choose HMRC-recognised software, submit your FPS on or before every pay run, and enrol eligible employees into a workplace pension from day one. Every deadline is fixed, every penalty is avoidable, and the tools to stay compliant are either free or low cost. For a UK startup making its first hire, getting how to set up PAYE right from the start is far less work than correcting it under pressure from HMRC or The Pensions Regulator later.
Sources: GOV.UK (register-employer, PAYE guidance, recognised software list, updated April 2026); The Pensions Regulator (earnings thresholds 2026/27, declaration of compliance guidance); Low Incomes Tax Reform Group (employer auto-enrolment guidance, April 2026); Department for Work and Pensions (AE thresholds review 2026/27); HMRC RTI Data Item Guide 2025/26.
