Hiring your first employee 2026/27 — the small business guide.

Hiring your first employee is exciting and terrifying in roughly equal measure. There's the optimism of growth — finally, you'll have help, you can take a holiday, you can specialise rather than do everything yourself. And there's the genuine weight of taking responsibility for another person's livelihood, navigating an employment law regime that has just been significantly tightened, and managing the real ongoing cost of having a payroll.

This guide is written for sole traders and small limited companies in NE London and the surrounding areas considering their first hire in 2026/27. It covers everything from the legal registrations through to the practical mechanics of running payroll month-to-month, with the verified 2026/27 rates and the substantial changes from the Employment Rights Act 2025 that came into force in April 2026.

What's changed in 2026/27

Before getting into the mechanics, it's worth understanding what's new — because the employment landscape shifted substantially over the last 12 months.

Employer NIC rose to 15% (April 2025)

The biggest change. From 6 April 2025, the standard rate of employer NIC increased from 13.8% to 15%, and the secondary threshold at which employer NIC starts being charged dropped sharply from £9,100 to £5,000 per year. Both changes together substantially increased the cost of employing people. For an employee earning the UK average salary of £36,036, employer NIC rose by 25% from £3,715 to £4,655 per year. For lower-paid roles, the percentage hit was higher: at £20,000 salary, employer NIC rose 50% from £1,504 to £2,250.

The Employment Allowance also went up — from £5,000 to £10,500 for 2026/27 — which helps smaller employers absorb the increase. Better still, the previous restriction that excluded employers with a prior-year NIC bill over £100,000 has been removed, so most small businesses now qualify.

Employment Rights Act 2025 — major employment law reform

The Employment Rights Act 2025 received Royal Assent on 18 December 2025 and represents the most substantial reform of UK employment law in years. Most provisions are being phased in during 2026 and 2027. The April 2026 changes most relevant to first-time employers include:

• Statutory Sick Pay (SSP) payable from day one of sickness (no three-day waiting period), with the Lower Earnings Limit removed so all employees are eligible regardless of earnings, and the rate increased to £123.25/week
• Paternity leave and unpaid parental leave become day-one rights (no qualifying service requirement)
• Bereaved Partner's Paternity Leave introduced as a new entitlement
• Fair Work Agency established to enforce employment rights

Further changes — including making unfair dismissal a day-one right (currently requires 2 years' service) — have been pushed back to 2027 to give employers time to adapt. But the direction of travel is clearly towards stronger employee protections from earlier in the relationship.

2026/27 statutory pay rates

From 6 April 2026, statutory family pay (SMP, SPP, SAP and others) increased to £194.32/week (up from £194.32) for weeks 7 onwards. Maternity allowance also increased to the same rate. National Living Wage for those aged 21+ increased to £12.71/hour from 1 April 2026.

The real cost of hiring

The number that matters isn't the salary you offer — it's the all-in annual cost to your business. For a £30,000 gross salary in 2026/27, here's what it actually costs.

For a more realistic understanding, also factor in the costs that are harder to put a number on:

• Recruitment — agency fees (15–25% of first-year salary), advert costs, your time interviewing
• Onboarding — your time training, lost productivity in the first few months
• Equipment — laptop, phone, software licences, desk space
• Holiday and sickness cover — when they're off, the work either doesn't get done or you do it yourself
• Performance risk — what if they're not the right hire? Sacking someone is genuinely painful even when legally straightforward
• Discretionary benefits — bonuses, training budget, perks if you want to retain them

The rule of thumb most accountants use: the true cost of an employee is 25% to 40% more than their gross salary in the first year, dropping to about 18% to 25% in steady state. Build this into your hire decision — if the role doesn't generate enough additional value to cover the loaded cost, don't make the hire.

Same example with Employment Allowance maxed out

Employment Allowance is the single most important tax break for first-time employers. If you're eligible, it wipes out the first £10,500 of your annual employer NIC bill. For a small business with one or two employees on modest salaries, this often means £0 employer NIC for the entire year. The eligibility rules are tighter than you might assume — see the dedicated section below.

PAYE registration with HMRC

Before you can pay any employee even one penny, you need to register as an employer with HMRC and get set up on PAYE (Pay As You Earn). The process is straightforward but timing is critical — HMRC processing takes up to 5 working days for the registration to complete, plus another few days for the activation codes to arrive in the post.

Start the registration at least 2 weeks before your first payday. Late registration risks PAYE filing penalties from your first month.

How to register

1. Go to gov.uk/register-employer and start the online registration form
2. Provide your business details (company number if limited, UTR, registered address)
3. Confirm the date your first employee starts work
4. Submit and wait for HMRC to process (typically 5 working days)
5. HMRC posts your Employer PAYE Reference (format: 3 digits / 5 alphanumeric, e.g. 120/AB12345) and Accounts Office Reference (format: 3 digits PA 8 digits, e.g. 120PA12345678) to your registered office
6. Enter both references into your payroll software when prompted

You only register once — even if you take on more employees later, you continue using the same Employer PAYE Reference.

What if you've already missed it?

If you've already paid an employee without registering, register immediately and set the start date as the actual first payday. HMRC will issue late filing penalties for each missed RTI submission (typically £100 per filing), but they reduce these penalties if you've voluntarily disclosed and made good your filings quickly. The longer you leave it, the more painful it gets.

Running payroll month-to-month

Once registered, you need to run payroll on or before each payday. Modern payroll software has made this much simpler than it used to be, but there are still operational rhythms a first-time employer needs to understand.

The monthly cycle

If your average monthly PAYE liability is under £1,500, HMRC allows quarterly payments rather than monthly — quarter ends 5 July, 5 October, 5 January, 5 April, with payment due by the 22nd of the following month. Useful for very small payrolls.

Payroll software options

You need HMRC-recognised payroll software. The main options for small employers:

• Bundled with cloud accounting — Xero Payroll, FreeAgent Payroll, QuickBooks Payroll. Convenient if you already use the platform. £4–10/month/employee on top of base subscription.
• Standalone payroll software — BrightPay, Moneysoft, 12Cloud Payroll. From £100/year for small businesses, often more capable than bundled options.
• HMRC's free Basic PAYE Tools — free, basic, no payslip generation, no pension integration. Only works for very small employers (up to 10 employees) and frankly is best avoided unless you really need free.
• Outsourced to accountant — your accountant handles everything. At Fernside we include payroll for up to 5 employees in our standard limited company package.

Pension auto-enrolment — what you must do

Workplace pension auto-enrolment is one of the legal duties that first-time employers most often underestimate. It applies to every UK employer with at least one employee — there's no exemption for being small or for being new.

The basic rules

You must automatically enrol any employee who:

• Is aged 22 or over, but under State Pension age
• Earns more than £10,000/year (the auto-enrolment trigger)
• Ordinarily works in the UK

Employees outside this group still have rights:

• Aged 16–21 or State Pension age and above, earning over £6,240 — can request to opt in, and you must contribute if they do
• Earning under £6,240 — can join voluntarily, but you're not required to contribute (they're "entitled workers")

Contribution rates

Minimum total contribution is 8% of qualifying earnings, split as 3% employer + 5% employee (the employee 5% includes basic-rate tax relief from HMRC, so they actually contribute 4% from net pay if using a relief-at-source scheme).

Qualifying earnings are the band between £6,240 and £50,270 for 2026/27. Earnings outside this band aren't pensionable under the standard auto-enrolment rules (though you can voluntarily contribute on the full salary if you choose).

Setting up the scheme

You need a qualifying workplace pension scheme in place by the day your employee starts (the "duties start date"). For most first-time employers, the practical options are:

• NEST — set up by the government specifically to support small employers. Free for employers, simple to use, accepts any employer, integrates with most payroll software. The default choice for first-time employers.
• The People's Pension — established master trust, low employee charges, slightly more polished interface than NEST
• Smart Pension — modern interface, strong app, integrated with several cloud payroll systems
• NOW: Pensions — established master trust, monthly employer fee

For genuine first-time employers without an existing pension preference, NEST is hard to beat — free to the employer, straightforward setup, and well-understood by accountants and payroll software.

Declaration of Compliance

Within 5 months of your duties start date, you must complete a Declaration of Compliance with The Pensions Regulator confirming you've set up a scheme and enrolled eligible employees. Failure to declare can trigger fixed penalty notices of £400 plus daily escalation. This is one of the most commonly missed obligations — set a calendar reminder.

Re-enrolment every 3 years

Every three years from your original duties start date, you must re-enrol any employees who previously opted out of the scheme, and submit a new Declaration of Compliance. This catches people who opted out years ago and have potentially forgotten that they did.

Employment Allowance — your biggest tax break

For most small employers, Employment Allowance is the single most important thing to understand. It can reduce your employer NIC bill by up to £10,500 per year — and for a first-time employer with one or two staff on typical salaries, it often eliminates the bill entirely.

How it works

Each tax year, you can offset up to £10,500 against your employer Class 1 NIC liability. You claim it through your payroll software (tick a box in the first month of the new tax year), and it reduces what you owe HMRC each month until the full £10,500 is exhausted or the tax year ends.

Worked example

Single employee on £30,000 salary, payable monthly:

• Monthly employer NIC: £312.50 (15% × £2,083 monthly earnings above £417 monthly secondary threshold)
• Annual employer NIC before Employment Allowance: £3,750
• Employment Allowance claimed: £3,750 (caps at the actual NIC bill — you can't carry the unused allowance forward)
• Actual employer NIC paid: £0

For most small businesses, this means employer NIC is genuinely zero — which is why the £30,000 hire really does cost closer to £30,800 (just the pension contribution) rather than £34,500.

Who's eligible

Most small businesses qualify. The key exclusions:

• Single-director limited companies where the only paid person is that director. You become eligible once you have at least one other paid person — another director or any employee — being paid above the £5,000 secondary threshold.
• Public bodies and businesses doing more than 50% public sector work
• Personal, household or domestic workers (with some exceptions for care)
• Companies under common control claiming Employment Allowance through another related company (only one company in a group can claim)

The previous rule that excluded employers with prior-year secondary NIC liability over £100,000 was removed from April 2025, so the great majority of small businesses now qualify even after substantial growth.

Contracts and statements of particulars

From 6 April 2020, employers must provide a written statement of particulars to every new employee on or before their first day of work. Failing to do so isn't currently a free-standing offence with a fine, but it's evidence in any employment tribunal claim and the tribunal can award compensation specifically for failure to provide the statement.

What it must include

The Section 1 statement must cover, at minimum:

• Names of employer and employee, and date employment began
• Date continuous employment began (relevant if previous related service counts)
• Job title or brief description of work
• Place of work (single location or multiple)
• Rate of pay, how often paid, and when
• Hours of work, including normal working days and any compulsory overtime
• Holiday entitlement and holiday pay arrangements
• Sick pay arrangements
• Pension arrangements
• Notice periods (employer and employee)
• For non-permanent: end date or length of contract
• Disciplinary and grievance procedures
• Any collective agreements affecting the employee
• Probationary period details (if any)
• Training the employer requires

Statement vs contract

Technically a "statement of particulars" is just the minimum information set out above; an "employment contract" is the broader agreement governing the employment relationship. In practice, a properly-drafted employment contract serves both purposes — it includes the statutory particulars plus other terms you want to set out (confidentiality, IP ownership, restrictive covenants, expense policies, social media conduct, etc).

Where to get a contract

• Free templates — gov.uk has a basic template. ACAS has good guidance. Fine for straightforward employees in low-risk roles.
• HR document services — Citation, Peninsula, Avensure offer ongoing HR support including contract templates. £100–£300/month, often overkill for one or two employees.
• Employment solicitor for a one-off contract — £150 to £500 for a properly-drafted small business template. Worth doing if the role involves IP creation, access to confidential information, or any restrictive covenants.
• Online legal services — Sparqa Legal, Rocket Lawyer, LawDepot. £20–£100 per contract. Reasonable middle ground.

Whatever route you take, the contract should be on file before day one. If the relationship goes wrong, the absence of a written contract is one of the worst positions to be in as an employer.

Statutory sick and family pay

Even with just one employee, you may end up paying statutory sick, maternity, paternity or other family-related pay. These payments are mostly recoverable from HMRC for small employers, but you need to know the framework.

Statutory Sick Pay (SSP) — major changes April 2026

SSP changed substantially under the Employment Rights Act 2025:

• Payable from day one of sickness — no three-day waiting period
• All employees eligible — the Lower Earnings Limit has been removed
• Rate: £123.25/week (from 6 April 2026) — or 80% of average weekly earnings if lower
• Payable for up to 28 weeks in any one period of sickness

For most small employers, SSP cost is unrecoverable from HMRC (the old Percentage Threshold Scheme was abolished years ago). This makes employee absence genuinely costly — you're paying SSP plus the productivity loss plus, often, cover costs.

Statutory Maternity Pay (SMP)

For employees with 26+ weeks' service by the 15th week before the expected week of childbirth:

• First 6 weeks: 90% of average weekly earnings (no cap)
• Next 33 weeks: lower of £194.32/week (from April 2026) or 90% of average weekly earnings
• Remaining 13 weeks (52 in total): unpaid maternity leave

Most of SMP is recoverable from HMRC. Small employers (annual NIC liability under £45,000) can reclaim 103% of SMP paid (the extra 3% is Small Employers' Compensation). Larger employers reclaim 92%. The recovery happens automatically through reduced PAYE remittances — your payroll software handles this if set up correctly.

Statutory Paternity Pay (SPP) and others

Statutory Paternity, Adoption, Shared Parental, Parental Bereavement, and the new Bereaved Partner's Paternity Pay all use the same weekly rate (£194.32 for 2026/27). Same general recovery rules apply for small employers.

The Employment Rights Act 2025 made paternity leave and unpaid parental leave day-one rights from 6 April 2026, removing the previous service requirements.

The contractor alternative

Before committing to a payroll, it's worth seriously considering whether the work could be done by a self-employed contractor or a small agency instead. The economics and the legal position are different.

When a contractor makes sense

• The work is project-based or irregular rather than ongoing
• You need specialist skills only occasionally
• The contractor genuinely has other clients and operates independently
• You can't predict the volume or are testing whether the work will be enough to justify an employee
• You want to defer the full employer responsibility while you grow

The IR35 / employment status problem

HMRC actively scrutinises arrangements where a worker is effectively an employee but labelled as a contractor — usually because the engager is trying to avoid employer NIC, pension, holiday pay and employment rights. If HMRC successfully reclassifies the relationship, the engager (you) becomes liable for back PAYE, employer NIC, interest and penalties, often for several years' worth.

Genuine indicators of self-employment:

• Control — the contractor decides how, when and where the work is done
• Equipment — provides their own laptop, tools, software
• Substitution — has the right to send a substitute to do the work (and could realistically do so)
• Financial risk — can lose money on a job if it goes badly, isn't paid for downtime
• Multiple clients — works for several customers, isn't economically dependent on you
• Their own business — has business insurance, marketing, an established trading identity

If you need someone to do regular work for you under your direction, in your premises, on your equipment, on set hours — they're an employee in substance, regardless of what you call them. Calling them a contractor and paying them via invoice doesn't change the legal reality.

The off-payroll working rules (IR35)

If your contractor operates through their own limited company (a "personal service company"), the off-payroll working rules apply. For small clients (you meet two of three: ≤£10.2m turnover, ≤£5.1m balance sheet, ≤50 employees) the responsibility for assessing IR35 status stays with the contractor's company. For medium and large clients, the engager (you) is responsible for the assessment and for deducting PAYE/NIC if inside IR35. Most first-time employers reading this guide will be small clients and therefore not directly responsible — but the underlying employment status question still matters.

30-day setup timeline

If you've decided to hire and have a candidate lined up, here's a realistic timeline from offer to first payday.

Common mistakes first-time employers make

1. Leaving PAYE registration too late

HMRC's processing isn't instant. Register at least 2 weeks before your first payday. Late registration means your first RTI submission is automatically late, triggering filing penalties.

2. Not claiming Employment Allowance

One in three eligible small businesses doesn't claim Employment Allowance, either because they don't know they're eligible or because they forget to tick the box in their payroll software. That's £10,500 of free money each year. Tick the box.

3. Forgetting the Declaration of Compliance

The Pensions Regulator is owed a Declaration of Compliance within 5 months of your duties start date. Missing it triggers a £400 fixed penalty plus daily escalation. Set a calendar reminder.

4. Misclassifying employees as contractors

Calling someone a contractor doesn't make them one. If the relationship has all the hallmarks of employment, HMRC can reclassify and demand back PAYE/NIC for years of work, plus interest and penalties. When in doubt, treat as employee — or get the relationship structured properly with proper contractor protections.

5. No employer's liability insurance

This is required by law from the day your first employee starts. The maximum fine for not having it is £2,500 per day. Most small business insurance policies bundle it as standard, but check yours specifically.

6. Not handing over a contract / statement of particulars

Statement of particulars must be in writing and given on or before day one. Failing to do so doesn't prevent the employment relationship existing but does give the employee a free strike at tribunal if anything else goes wrong later.

7. Forgetting holiday entitlement

Statutory minimum is 5.6 weeks (28 days for a full-time employee, pro-rated for part-time). Many small employers undercount holiday or forget bank holidays count towards the 28 days unless explicitly extra. Get this wrong and you owe back-pay.

8. Not running monthly P32 reconciliation

Your payroll software produces a P32 each month showing what you owe HMRC. Pay this amount by the 22nd. Don't pay round numbers, don't pay your monthly average — pay the actual P32 amount. Underpayment triggers interest; overpayment is annoying to recover.

Sources & further reading

The figures and rules in this guide are based on the following HMRC, gov.uk and Pensions Regulator publications. Always check the latest version on gov.uk before acting:

• Register as an employer with HMRC (gov.uk)
• National Insurance rates and categories (gov.uk)
• Employment Allowance: eligibility and how to claim (gov.uk)
• Workplace pensions: employers (The Pensions Regulator)
• National Minimum Wage rates (gov.uk)
• Statutory Sick Pay (SSP) (gov.uk)
• Statutory Maternity Pay (gov.uk)
• Right to work checks (gov.uk)
• Check employment status for tax — CEST (gov.uk)

This guide was last reviewed in May 2026 and reflects the 2026/27 tax year. Tax rates and thresholds may change at subsequent Budgets.

Common questions

How much does it actually cost to hire someone on a £30,000 salary?

For 2026/27, a £30,000 salary costs the employer roughly £33,750 once you add employer NIC of £3,750 (15% on the £25,000 above the £5,000 secondary threshold), but the Employment Allowance can wipe out the first £10,500 of employer NIC liability for eligible small businesses. Add a 3% pension contribution on qualifying earnings (£712) plus payroll software (£200/year) and you're looking at around £34,700 all-in, or £24,200 if your first £10,500 of employer NIC is covered by Employment Allowance.

When do I need to register as an employer with HMRC?

You must register before the first payday, and ideally at least 2 weeks before, because HMRC processing can take that long. Register too late and you risk PAYE filing penalties from your first month. The process is online at gov.uk and takes about 20 minutes. You'll receive an Employer PAYE Reference and Accounts Office Reference, both of which your payroll software will need.

Do I need pension auto-enrolment for just one employee?

Yes. Auto-enrolment duties apply to every UK employer with at least one employee, regardless of company size. If your employee is aged 22 to State Pension age and earns over £10,000 a year, you must enrol them in a qualifying workplace pension scheme and contribute at least 3% of their qualifying earnings (£6,240 to £50,270 band). You must also declare your compliance with The Pensions Regulator within 5 months of your duties start date.

Can I claim Employment Allowance as a single-director limited company?

No. A limited company where the only person paid is a single director is not eligible for Employment Allowance. You become eligible once you have at least one other employee (or a second director) being paid above the secondary threshold of £5,000. The Employment Allowance of £10,500 for 2026/27 then reduces your employer NIC bill. The rule change in April 2025 removed the previous £100,000 prior-year NIC liability cap, so most other employers qualify.

What changed with Statutory Sick Pay in April 2026?

Under the Employment Rights Act 2025, three big changes took effect on 6 April 2026: SSP is now payable from day one of sickness (no three-day waiting period), the Lower Earnings Limit was removed so all employees are eligible regardless of earnings, and the weekly rate increased to £123.25. For lower-paid employees, SSP is calculated as the lower of 80% of average weekly earnings or the flat £123.25 rate.

What's the National Living Wage for 2026/27?

From 1 April 2026, the National Living Wage for workers aged 21 and over is £12.71 per hour (up 4.1% from £12.71). For ages 18 to 20 it's £10.85 (up 8.5%), and for 16-17 year olds and apprentices it's £8.00. Annual cost of a full-time minimum-wage employee at the 21+ rate works out to roughly £24,800 on a 37.5-hour week, before employer NIC, pension and other costs.

Do I need an employment contract from day one?

Yes. Since 6 April 2020, employers must provide a written statement of particulars on or before the employee's first day of work. This must cover key terms including pay, hours, holiday, sick pay, pension, notice periods, place of work, and disciplinary procedures. In practice, a properly-drafted employment contract serves both purposes.

How long is the probationary period and can I sack someone during it?

Probationary periods are typically 3 to 6 months and have no special legal status — they're a contractual convention rather than a separate legal regime. Under current rules, employees gain the right to claim unfair dismissal after 2 years of continuous service. The Employment Rights Act 2025 includes provisions to make unfair dismissal a day-one right, though full implementation has been pushed back to 2027. Always follow a fair process even during probation.

What about the alternative — hiring a contractor or freelancer instead?

Contractors can be the right answer for project work, irregular needs, or specialist skills you only need occasionally. But HMRC scrutinises arrangements where a worker is effectively an employee dressed up as a contractor. If you need someone to do regular work for you under your direction, in your premises, on your equipment, on set hours, they're an employee — calling them a contractor doesn't change the substance.