How to set up PAYE as an employer: step-by-step

Taking on your first employee, or paying yourself a salary through your own company, means operating PAYE: deducting tax and National Insurance from pay and reporting it to HMRC. The set-up takes a few days. This guide walks through it in order.

Do you need to register?

HMRC expects you to register as an employer when you start employing staff, before the first payday. HMRC’s long-standing tests are that registration is needed if anyone you employ:

• is paid at or above the Lower Earnings Limit, £129 a week in 2026/27, or
• receives expenses or benefits, or
• has another job or receives a pension

In practice most employers register for every employee, because payroll records are needed anyway and many employees have other income. Directors of limited companies are employees of the company, and HMRC’s guidance is that you must register even if the only person you employ is yourself as the company’s sole director.

Step 1: register with HMRC

Register online through HMRC. You can register up to two months before you start paying people, and no later than the first payday. You need:

• your business details, including your company registration number if you are a company
• the date you will first pay employees
• details of the people you will employ, such as whether they are directors

HMRC sends your employer PAYE reference and Accounts Office reference by post, which usually takes up to five working days, and longer if HMRC needs to check your details. You need both to run payroll and pay HMRC. If you have to pay someone before the reference arrives, run the payroll as normal, keep the Full Payment Submission and send it as soon as you have the reference.

Step 2: choose payroll software

Payroll must be reported to HMRC in real time, so you need software that can make RTI submissions. Options include:

• HMRC’s Basic PAYE Tools, free for employers with fewer than 10 employees
• commercial payroll software, often part of cloud accounting packages
• a payroll bureau or your accountant, who run payroll for you

Our payroll software comparison covers the main products.

Step 3: check your employee’s details

Before their first payday:

• carry out a right to work check; you can be fined for employing someone without the right to work in the UK
• collect their P45 from their previous job, or ask them to complete HMRC’s starter checklist
• record their name, address, date of birth, National Insurance number and bank details

The P45 or starter checklist tells you which tax code to use. Without it, you will need to use an emergency tax code.

Step 4: set up workplace pension auto-enrolment

Every employer must provide a workplace pension and automatically enrol eligible staff, those aged 22 to State Pension age earning more than £10,000 a year. Minimum contributions are 8% of qualifying earnings, with at least 3% from the employer. Your duties start on the day the first employee starts work, and you must declare compliance to The Pensions Regulator within five months. See pension auto-enrolment.

Step 5: get employers’ liability insurance

Most employers must have employers’ liability insurance covering at least £5 million, from an authorised insurer, from the day they become an employer. Family businesses employing only close family members may be exempt, but companies employing their director-shareholders should check the rules.

Step 6: run your first payroll

On or before each payday:

1. Calculate gross pay, then deduct Income Tax, employee National Insurance, student loan repayments and pension contributions.
2. Give the employee a payslip showing pay and deductions.
3. Send a Full Payment Submission to HMRC on or before payday.

Then by the 22nd of the following tax month (19th by cheque), pay HMRC the tax and NI deducted plus employer NI, less any Employment Allowance. See Real Time Information for the reporting detail and Class 1 National Insurance for the rates.

Ongoing and year-end tasks

Claiming the Employment Allowance

If you are eligible, claim the £10,500 Employment Allowance through your payroll software on an EPS. It is not available to companies where the only employee paid above £5,000 a year is a director. See the Employment Allowance guide.

Frequently asked questions

When should I register as an employer?

Up to two months before your first payday, and no later than the day you first pay someone.

How long does it take to get a PAYE reference?

Usually up to five working days, though it can take longer if HMRC needs to check your details.

Do I need to register PAYE to pay myself as a director?

Usually yes. HMRC’s guidance is to register even if the only employee is you as the company’s sole director. Many directors set a salary around the National Insurance thresholds; see National Insurance for directors.

Can I run payroll myself?

Yes. HMRC’s free Basic PAYE Tools work for employers with fewer than 10 employees, and commercial software or an accountant can handle larger or more complex payrolls.