Taking on your first employee can be daunting, but it is a necessary step for startups with the ambition to grow. Hiring employees allows you to focus on your strengths rather than being a generalist managing all aspects of the business.
That said, employing staff comes with a range of legal, administrative, and compliance responsibilities related to their remuneration, rights, and overall well-being. It is essential to consider these obligations upfront to ensure compliance with employment laws and to understand the financial impact on your business.
This guide provides an overview of key considerations, including employment contracts, payroll setup, pensions, and employer liabilities. You’ll also find information on useful HR and payroll software, government incentives, and tax-efficient schemes like EMI share options.
By following these best practices, you can ensure compliance with UK employment law while streamlining your HR and payroll operations.
All employees should be provided with a contract, which can be issued either as a written document or agreed verbally.
If you are unsure whether an individual qualifies as an employee or a contractor, refer to the rules surrounding IR35 and use the government's Check Employment Status for Tax (CEST) tool. HMRC enforces legislation to determine whether contractors are effectively acting as disguised employees. If found non-compliant, contractors - not the hiring company - will be responsible for financial penalties.
Employment contracts should clearly define key terms of engagement, including job titles, descriptions, salaries, working hours, probation periods, and holiday entitlements.
Full-time employees in the UK are entitled to a minimum of 28 days of paid annual leave, including eight national bank holidays.
Businesses operating in innovative or specialist sectors may include non-compete clauses to prevent employees from working for competitors for a set period after leaving the company.
Original signed copies of employment contracts should be securely stored for internal records.
Tools such as CharlieHR, BrightHR, HiBob and BambooHR allow businesses to manage HR processes, including storing personal data, handling holiday requests, conducting performance reviews, and processing payroll-related data.
Implementing a cloud-based HR solution can save time and, for smaller companies, may eliminate the need to hire dedicated HR personnel. At Barnes & Scott, we use CharlieHR and highly recommend it as an efficient and cost-effective tool.
These tools are affordable, with subscriptions starting from just a few pounds per month per employee. Many providers also offer free trials.
Employers are legally required to obtain employers’ liability insurance, which protects against compensation claims arising from employees becoming injured or ill due to work-related activities.
Most businesses must have this insurance, even if their workforce consists of contractors or casual workers. Failure to comply can result in fines of £2,500 for each day without cover. Policies must provide at least £5 million in coverage from an authorised insurer.
If you already have business insurance, you can often add employers’ liability insurance at a relatively low cost. Contact your existing insurance provider first to explore this option.
Employing staff requires setting up and managing payroll, which calculates employees' net salaries along with deductions for National Insurance, pensions, and student loans. Additionally, companies must pay employer’s National Insurance contributions.
The first step for companies setting up payroll is to register as an employer with HMRC to get a login for their PAYE online service.
Businesses must then select payroll software to record salaries, process deductions, and report this data to HMRC. Payroll information must be submitted monthly through RTI (Real-Time Information) filings. Popular payroll software providers include Xero, QuickBooks, and Sage.
Payroll mistakes can be costly, so outsourcing to an accountant may be a preferable option. Barnes & Scott handle payroll setup and administration for all their clients. While Xero’s payroll feature works well for smaller companies, we use Brightpay Connect for its enhanced functionality.
For a streamlined payroll process, refer to Barnes & Scott’s support site.
All UK companies must set up and manage a workplace pension scheme for their employees. Employees are typically auto-enrolled but can choose to opt out.
Employers must match employee contributions to a minimum level. Currently, employees contribute 5% of their salary, and employers must contribute at least 3%.
Businesses need to choose a pension provider. Popular options include NEST, which is government-backed, easy to use, and available to all employers.
For guidance on selecting a pension scheme and updates on contribution rates, visit the the Pensions Regulator website.
Businesses can claim up to £5,000 per year on employer Class 1 National Insurance contributions (NICs) through HMRC’s employment allowance. This incentive encourages businesses to hire staff.
Most businesses and charities qualify for this allowance. If you're unsure, contact us for advice.
The claim can be made via payroll software or by your accountant when submitting an Employment Payment Summary (EPS) to HMRC.
If you have been employing staff for several years but have not claimed the allowance, you may be able to claim it retrospectively.
Before hiring new employees, companies should assess the full cost of employment beyond just salaries.
Employers must budget for additional costs such as National Insurance (up to 15%) and pension contributions (3%).
Example calculation (based on 2025/26 rates):
| Expense | Amount |
|---|---|
| Full-time salary | £40,000 |
| Employer's Class 1 NICs (15% above £5,000) | £5,250 |
| Employment Allowance deduction | -£5,250 |
| Employer’s pension contribution (3%) | £1,200 |
| Total annual cost | £41,200 |
Note: For additional employees, costs will be higher as the Employment Allowance is limited to £10,000 total per year.
For high-growth companies, EMI share option scheme (EMI) share option schemes can be an effective way to attract and retain top talent without offering high salaries.
EMI schemes are tax-efficient, as employees do not pay income tax when granted options or when exercising them. They only pay Capital Gains Tax (CGT) upon selling their shares, typically at a reduced rate of 10% due to Entrepreneur’s Relief.
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