Taking on your first employee as a sole trader: PAYE, payroll and records explained

Taking on your first employee is a big moment. It usually means your sole trader business is growing, your workload is increasing, and you are ready to get extra help instead of doing everything yourself.

It can also feel like a lot to manage. Suddenly, you are not just looking after customers, invoices and expenses. You are also responsible for paying someone correctly, deducting tax and National Insurance, keeping payroll records, checking minimum wage rules and reporting information to HMRC.

The good news is that you can employ staff as a sole trader. You do not need to form a limited company just because you are hiring your first worker. You simply need to set things up properly from the start. Working with an accountant for sole trader support can make the process much easier, especially if you want everything handled clearly and without unnecessary stress.

Can you employ someone as a sole trader?

Yes, you can. A sole trader can hire employees in the same way as many other small businesses. Your employee works for your business, but you remain personally responsible for the business finances, payroll obligations and HMRC compliance.

This is why it is important to understand the difference between using a freelancer and employing someone. A freelancer or subcontractor normally manages their own tax affairs. An employee, however, is paid through payroll, may need a contract, may qualify for workplace pension duties, and must be paid at least the legal minimum wage.

In 2026, the National Living Wage for workers aged 21 and over is £12.71 per hour. If you are hiring younger staff or apprentices, different minimum rates may apply. You should always check the current rate before agreeing pay, especially if you pay hourly wages.

When do you need to register for PAYE?

PAYE stands for Pay As You Earn. It is HMRC’s system for collecting Income Tax and National Insurance from employees’ wages.

You generally need to register as an employer if your employee is paid £96 or more per week, receives expenses or benefits, has another job, receives a pension, or has recently received certain state benefits. Even if you do not need to register for PAYE immediately, you still need to keep proper payroll records.

You must register before the first payday, but you cannot register more than 2 months before you start paying staff. It is sensible to do this early so you have your PAYE reference and Accounts Office reference ready before the first payroll run.

If you already use a self-employed accountant, they can help you check whether PAYE applies, register correctly and avoid rushing everything just before payday.

What payroll actually involves

Payroll is more than just transferring wages to your employee’s bank account. Each time you pay your employee, you need to calculate gross pay, deduct Income Tax, deduct employee National Insurance where applicable, work out employer National Insurance, include pension deductions if relevant, issue a payslip and report the payment to HMRC through Real Time Information.

For the 2026/27 tax year, employee National Insurance for a standard Category A employee is usually 8% on weekly earnings between £242.01 and £967, then 2% above that. Employer National Insurance is generally 15% from £96 per week for most Category A employees. This is one reason your true cost as an employer is higher than the salary alone.

For example, if you agree to pay someone £25,000 per year, you need to budget for more than £25,000. There may be employer National Insurance, pension contributions, payroll software costs, holiday pay and possibly accountant fees. Some eligible employers can reduce their employer National Insurance bill through Employment Allowance, which is up to £10,500 for 2026/27.

This is where professional sole trader accountancy services can help you understand the full cost before you hire.

What records do you need to keep?

Good payroll records protect you if HMRC ever asks questions. They also help you stay organised, especially when you are already managing your day-to-day sole trader accounts.

You should keep records of employee details, pay rates, hours worked, gross pay, tax deductions, National Insurance, pension deductions, holiday pay, sick pay, statutory payments, payslips, payroll reports and submissions sent to HMRC. You should also keep your employment contract, right to work checks, and any starter checklist or P45 information.

If your employee does not have a P45, you can use HMRC’s starter checklist to collect the information needed to set them up correctly on payroll. This helps avoid incorrect tax codes and unexpected tax issues later.

Simple systems matter. A certified QuickBooks accountant can help you keep payroll, bookkeeping and business records in one clearer process, rather than leaving everything spread across emails, spreadsheets and paper notes.

Do you need to offer a workplace pension?

Even if you only employ 1 person, you may have pension duties. This is known as automatic enrolment. Whether your employee needs to be enrolled depends on their age and earnings.

You normally need to assess your employee each pay period. If they qualify, you must enrol them into a workplace pension scheme and make employer contributions. If they do not qualify for automatic enrolment, they may still have the right to ask to join a pension scheme.

This is an area many first-time employers overlook. It is not just about paying wages. You need to think about payroll, pensions, HMRC filings and ongoing records from the beginning. If you want practical sole trader accounting support, it is worth getting advice before the first payday arrives.

How hiring affects your tax return

Hiring someone can increase your costs, but genuine staff wages are normally an allowable business expense if they are wholly and exclusively for your business. Employer National Insurance, pension contributions and payroll fees may also be allowable business costs.

This means your payroll records need to connect properly with your bookkeeping and annual Self Assessment tax return. If your records are incomplete, you may miss allowable expenses or struggle to explain figures later.

A self-assessment tax return accountant can help ensure your employee costs are recorded correctly and included in your tax return in the right way.

Common first-time employer mistakes

Many sole traders make the same mistakes when hiring for the first time. Some agree a wage without budgeting for employer costs. Others forget to register for PAYE before payday, miss pension duties, fail to issue payslips, or do not keep proper payroll records.

Another common mistake is mixing personal and business payments. If wages, supplier payments and personal spending all come from the same account without clear notes, your bookkeeping becomes harder than it needs to be.

If you are VAT registered, payroll itself is not VATable, but your wider business records still need to be accurate. A VAT return accountant can help you keep VAT, payroll and bookkeeping records aligned, so your figures are easier to manage.

Should you run payroll yourself?

You can run payroll yourself, but you need to be confident that you are using recognised payroll software, sending submissions on time, applying the right tax codes, keeping records and paying HMRC correctly.

For many sole traders, outsourcing payroll is simpler. You can focus on your customers while someone else handles payslips, HMRC submissions, deductions and payroll deadlines. This is especially useful if you are already busy enough to need your first employee.

Asmat & Co provides payroll accountant services in Slough for businesses that want payroll handled accurately and professionally. If you are based locally and want wider support from chartered accountants in Slough, you can also get help with bookkeeping, tax returns and ongoing compliance.

Get the setup right from the start

Taking on your first employee should feel exciting, not overwhelming. The key is to put the right structure in place before you pay them for the first time.

Register for PAYE if required. Choose payroll software or appoint an accountant. Collect the right employee details. Check minimum wage rates. Understand National Insurance and pension duties. Keep proper records. Make sure your payroll costs are included in your bookkeeping and tax return.

If you want friendly, fixed-fee accountants for self-employed individuals, Asmat & Co can help you move from working alone to employing staff with more confidence.

Ready to hire your first employee?

If you are taking on your first employee and want payroll, PAYE and records handled properly, Asmat & Co can help. Our team provides clear, practical sole trader accounting services with no jargon and no hidden surprises.

Book your free consultation today and let us help you set up payroll the right way from day one.

FAQs

Do I need to register for PAYE if I only employ 1 person?

You may need to register for PAYE even if you only employ 1 person. It depends on their pay, benefits, pension status and other circumstances. If they are paid £96 or more per week, PAYE registration is usually required.

Can a sole trader employ staff without becoming a limited company?

Yes. You can employ staff as a sole trader. You do not have to form a limited company, but you must follow employer rules for payroll, PAYE, records, minimum wage and pensions.

What information do I need from a new employee?

You normally need their full name, address, date of birth, National Insurance number, start date, pay details, P45 or starter checklist information, and right to work evidence.

How much does it cost to employ someone in the UK?

The cost is more than their basic wage. You may also need to pay employer National Insurance, pension contributions, holiday pay, payroll software costs and accountancy fees. Always calculate the full cost before hiring.

Can an accountant run payroll for a sole trader?

Yes. An accountant can help register you as an employer, run payroll, issue payslips, submit reports to HMRC, calculate deductions and keep your payroll records organised.