Before your first payday: registering as an employer

Taking on your first employee is a genuine milestone, but payroll is not something you can sort out in the week they start. You normally need to register with HM Revenue & Customs as an employer before the first payday, and you will need your PAYE reference and Accounts Office reference before you can run a payroll at all. Registration is done online and can take anything from a few days to a couple of weeks, so begin as soon as the job offer is accepted.

You will also need to gather a few things:

• Your employee's full name, address, date of birth and National Insurance number — ask for their P45 from a previous job, or have them complete a starter checklist if they do not have one
• A payroll scheme. Payroll software is the sensible route for almost everyone; manual payroll only works if you employ one or two people, and even then it is easy to get wrong
• Employer's liability insurance, which is a legal requirement for nearly all businesses with staff, with a minimum cover of £5 million

Do not forget to issue a written statement of employment particulars on or before day one — it is a legal requirement, not a nice-to-have.

Tax codes and National Insurance explained

A tax code tells your payroll software how much tax-free pay someone is entitled to. The most common code is 1257L, which gives the standard Personal Allowance of £12,570 a year. If your new employee hands you a P45, use the code on it. If they do not, use the starter checklist: code 1257L on a cumulative basis is usually correct for someone with no other job, while BR (all pay taxed at basic rate) applies if they have a second job or a pension in payment.

National Insurance is separate and works differently:

• Employee NI: deducted from wages once earnings rise above the primary threshold, currently £12,570 a year, at 8% up to the upper earnings limit and 2% above it
• Employer NI: paid by you on top of wages, at 15% on earnings above the secondary threshold
• Employer NI is a real cost of hiring. Budget for it before you agree a salary, not after.

You must also pay at least the National Minimum Wage for your employee's age band, and the rates change every April.

Payslips: what you must put on them

Every employee is legally entitled to an itemised payslip, on paper or electronically, on or before the day they are paid. A compliant payslip must show gross pay, all deductions and the reasons for them, and net pay. It should also include:

• The employer's name and the employee's name and payroll number
• The pay period and the payment date
• Tax deducted, National Insurance, pension contributions (yours and theirs), student loan repayments, and any other deductions such as salary sacrifice
• Hours worked if pay varies with hours, plus the rate of pay

Keep payslips simple and consistent. If you use payroll software, it will generate them for you, and your employee can download them from a portal rather than you emailing PDFs every month. Store copies — you will need them if there is ever a query.

Workplace pensions and auto-enrolment

Auto-enrolment is not optional. Every employer with at least one worker must assess their staff and put eligible workers into a pension scheme. Someone is eligible if they are aged between 22 and State Pension age and earn more than £10,000 a year; workers earning between £6,240 and £10,000 can ask to join and you must contribute for them.

The minimum contributions are based on qualifying earnings between £6,240 and £50,270: a total of 8%, of which at least 3% must come from you as the employer. You must also complete a declaration of compliance with The Pensions Regulator within five months of your first payday, and re-declare roughly every three years. Miss the declaration and the fines start automatically.

Reporting deadlines you cannot miss

Real Time Information reporting means you send payroll data to HMRC on or before each payday, not at the end of the tax year. Each run needs a Full Payment Submission (FPS) showing gross pay, tax and NI. If you have nothing to report in a month, send an Employer Payment Summary instead.

• Pay PAYE and NI to HMRC by the 22nd of the following month if paying electronically (19th if by post)
• File your final FPS of the tax year on or before the last payday, and mark it as final
• Give employees their P60 by 31 May
• Keep payroll records for at least three years after the tax year they relate to

Late filing penalties are charged per PAYE scheme, and they escalate quickly, so diarise deadlines rather than relying on memory.

Habits that keep payroll painless

Set a fixed payday and stick to it — mid-month is easier than month-end because you have time to fix problems. Run payroll a few days in advance, never on the day. Keep a separate pot for the tax, NI and pension money you are holding on behalf of others; it is not yours to spend. Finally, remember holiday entitlement of 5.6 weeks a year (pro-rated for part-timers), statutory sick pay and family leave all interact with payroll, so read up before the situation arises rather than during it.

Get the first three months right and payroll becomes a routine hour or two a month. Get them wrong and you will spend far longer unpicking it.