Hiring your first employee brings with it a new set of legal obligations that do not apply when a business is run solely by its director or directors. From registering as an employer to putting a compliant contract in place, each requirement carries its own deadline and its own consequences for getting it wrong. This article sets out exactly what a company must do once it takes on its first employee.
- Determine correctly whether the individual is an employee, worker or contractor, since tribunals look at the actual working relationship, not the label in the contract.
- Recognise that directors are not employees unless they have a distinct employment contract, which affects when employment law and PAYE duties first apply.
- Treat right to work checks, HMRC employer registration, written particulars, insurance and pension enrolment as deadline-driven tasks starting before or from day one.
- Budget for total employment cost, including employer National Insurance, pension contributions, insurance and administration, as these typically push costs well above basic salary.
Employee, Worker or Contractor: Getting the Status Right
Before anything else, a company must correctly identify the legal status of the person it is taking on, since employee, worker, and contractor each carry a different set of rights and obligations.
- An employee works under a contract of employment, is part of the business, and receives the fullest set of statutory protections, including the right to a written statement of particulars and access to statutory sick pay.
- A worker has a more limited relationship, often on a casual or flexible basis, and is entitled to some protections such as the National Minimum Wage and paid holiday, but not full employment rights such as protection from unfair dismissal.
- A contractor, by contrast, is genuinely self-employed and works for the company under a contract for services, rather than a contract of employment, meaning most employment obligations do not apply at all.
Getting this classification wrong can lead to consequences. If HMRC or an employment tribunal later decides that someone treated as a contractor was, in reality, an employee, the company can face backdated tax, National Insurance, and employment rights claims. The nature of the working relationship, not the label given to it in a contract, ultimately determines the correct status.
Why a Director Is Not Automatically an Employee
It is a common misconception that a company director is automatically an employee of their own company. In fact, a director’s role is a statutory office, created by company law, and is legally distinct from being employed under a contract of employment.
A director only becomes an employee if they also have a separate employment contract with the company, setting out duties, hours, and pay in the way an employment relationship would. Many director-shareholders of small companies do not have such a contract and instead take income through dividends, in which case they are not employees for the purposes of employment law, even though they run the business day to day.
This distinction matters because it affects whether a company is considered to have employees at all. A company can have directors but no employees, and the question of whether a limited company needs employees to operate depends on how the business chooses to structure its work rather than on any legal requirement to hire staff.
Carrying Out the Right-to-Work Check
Before an employee starts work, the employer must check that they have the legal right to work in the UK. This applies to every new employee, regardless of nationality, and must be completed before employment begins, not afterwards.
The check involves obtaining specified original documents, or completing an online check where the employee holds digital immigration status, and keeping a clear record of what was checked and when. Failing to carry out this check properly exposes the company to a civil penalty if the employee is later found not to have the right to work, and in serious cases can lead to criminal liability.
Registering as an Employer with HMRC
Once a company decides to take on its first employee, it must register as an employer with HMRC, generally before the first payday. This registration produces a PAYE reference, which the company then uses to report and pay tax and National Insurance on the employee’s behalf.
It is important to understand what PAYE involves and how income tax and National Insurance are deducted from wages before they reach the employee, and paid across to HMRC by the employer. This registration is separate from, and in addition to, the company’s own registration for Corporation Tax, which is covered as part of a company’s broader business tax obligations.
The Employment Contract and Written Statement of Particulars
Every employee is legally entitled to a written statement of particulars, setting out the key terms of their employment. This is a statutory requirement, distinct from any wider employment contract the company may also choose to put in place, though in practice many employers combine the two into a single document.
The written statement must include details such as the employee’s job title and start date, their pay and how often it is paid, their hours of work, holiday entitlement, and where they are based, along with details of any probationary period, notice periods, and the company’s disciplinary and grievance procedures. Most of this information must be given to the employee on or before their first day of work, with a small number of remaining details permitted within two months of the start date.
Failing to provide this statement does not prevent the employment relationship from existing, but it does expose the company to a claim at an employment tribunal, which can result in an award of compensation even where no other dispute exists between the parties.
Employers’ Liability Insurance
Almost every company with employees is legally required to hold employers’ liability insurance, covering the cost of compensation if an employee is injured or becomes ill as a result of their work. This requirement applies from the point a company has even one employee, and cover must meet a minimum level set by law.
Employers’ liability insurance sits alongside other forms of business cover a company may need. Operating without the required cover in place is a criminal offence, and can result in a substantial fine for every day the company remains uninsured.
Auto-Enrolment into a Workplace Pension
Most employees must be automatically enrolled into a workplace pension scheme, with contributions paid by both the employer and the employee. This duty applies to eligible staff aged between 22 and State Pension age who earn above a set annual threshold, and it begins from the employee’s first day of employment.
Employees who do not meet the age or earnings criteria for automatic enrolment still generally have the right to opt in and receive an employer contribution if they choose to do so. The employer must assess every new employee against these criteria and act accordingly, rather than treating auto-enrolment as something to consider only once a business reaches a certain size.
Payroll Reporting Obligations
Once an employee is on the payroll, the company must report pay and deductions to HMRC on or before each payday, using a Full Payment Submission. This report tells HMRC how much the employee has been paid, and how much tax, National Insurance, and any student loan or pension contributions have been deducted.
Payroll reporting is an ongoing obligation for as long as the company has employees, not a one-off task completed when the first hire is made. Errors or late submissions can result in penalties, and because payroll interacts directly with an employee’s tax position, mistakes can be time-consuming to correct after the fact.
The Real Cost of Hiring an Employee
The cost of employing someone is more than just their gross salary, and companies that overlook this often underestimate what a new hire actually costs the business. From April 2026, the National Living Wage for employees aged 21 and over is £12.71 an hour, with lower rates applying to younger workers and apprentices.
Employer Class 1 National Insurance is charged at 15% on earnings above the secondary threshold, which sits at £5,000 a year (£417 a month) for 2026/27. Many companies can reduce this liability using the Employment Allowance, which allows eligible employers to reduce their employer National Insurance bill by up to £10,500 a year.
Auto-enrolment adds a further cost, since employers must contribute a minimum of 3% of an eligible employee’s qualifying earnings, which for 2026/27 run between £6,240 and £50,270 a year. Employers’ liability insurance, payroll administration, and statutory sick pay obligations all add further ongoing costs on top of gross pay, meaning the true cost of a new employee is typically well above their headline salary.
| Cost element (2026/27) | Rate or threshold |
|---|---|
|
National Living Wage (21 and over) |
£12.71 per hour |
|
Employer National Insurance rate |
15% above £5,000 a year |
|
Employment Allowance (max relief) |
Up to £10,500 a year |
|
Auto-enrolment qualifying earnings band |
£6,240 to £50,270 a year |
|
Minimum employer pension contribution |
3% of qualifying earnings |
Understanding Your Legal Obligations as an Employer
Taking on a first employee comes with enormous benefits, however, it changes a company’s legal position immediately. Each obligation described above applies from the point the employment relationship begins. Approaching these requirements methodically, rather than addressing them as problems arise, gives a company the best chance of avoiding penalties and disputes once it starts to grow its workforce.
Tags: Directors, Employment, HMRC, PAYE
