How to Set Up Employee Payroll for a Small Business: A Complete Step-by-Step Guide

Before You Hire Your First Employee

Hiring your first employee is a milestone — and the moment you become responsible for a complex set of legal and financial obligations. Setting up payroll correctly from the start prevents the painful process of fixing errors later. This guide walks through every step in plain English.

Step 1: Register as an Employer

Before you can pay anyone, register with the relevant tax authority. In the UK, register with HMRC for a PAYE reference number. In the US, obtain an Employer Identification Number from the IRS. This typically takes a few days to a week — do it before your employee's first pay date.

You will also need employer's liability insurance before an employee starts work — this is a legal requirement in the UK and many other countries.

Step 2: Collect Employee Information

• Full legal name as it appears on official documents
• National Insurance or Social Security number
• Date of birth — relevant for tax codes and pension rules
• Home address
• Bank account details for salary payment
• P45 from previous employer (UK) — or complete a starter checklist if unavailable
• Right to work documentation — must be verified before employment begins

Step 3: Set Up Your Payroll System

You have two options: outsource to an accountant or use payroll software. For businesses with up to around 20 employees, modern payroll software like Bizpro Desk is significantly cheaper than outsourcing and gives you more visibility and control. Configure your pay frequency (weekly, bi-weekly, or monthly), pay date, pension scheme, and employee profiles.

Step 4: Understand PAYE, NI, and Tax Codes

Under PAYE, you deduct income tax and National Insurance from employee pay before paying them, then remit these to HMRC. Tax codes determine how much income tax to deduct — 1257L is most common in the UK. As an employer, you also pay employer's National Insurance at roughly 13.8% on earnings above the secondary threshold — a cost often overlooked when budgeting for a hire.

Step 5: Set Up Pension Auto-Enrolment

In the UK, employees aged 22 or over earning more than £10,000 per year must be automatically enrolled in a workplace pension scheme. You must contribute a minimum of 3% of qualifying earnings; the employee contributes 5%. The Pensions Regulator issues significant fines for non-compliance. Bizpro Desk calculates pension deductions automatically once your scheme is configured.

Step 6: Run Your First Payroll

Before going live, run a test calculation manually to verify your software produces correct numbers. On your first real pay run: review the payroll summary before approving, submit the Full Payment Submission to HMRC on or before the pay date, transfer net pay to employees, pay HMRC the deducted tax and NI by the 19th of the following month, and send employees their payslips — they have a legal right to receive them.

Step 7: Keep Payroll Records

HMRC requires payroll records for a minimum of three years from the end of the relevant tax year — most accountants recommend six years. Records must include pay and deduction details for each employee, payments made to HMRC, and records of any benefits provided. Bizpro Desk stores all payroll records securely and makes them accessible for HMRC enquiries.

Common Payroll Setup Mistakes

• Not registering before the first pay day — retrospective submissions are complicated
• Using the wrong tax code — always request a P45 from new starters
• Forgetting employer NI in salary budgets — adds 13.8% to employment costs above the threshold
• Missing auto-enrolment deadlines — the Pensions Regulator has strict timelines
• Not issuing payslips — employees have a legal right to receive them

Conclusion

Setting up payroll correctly the first time is far easier than fixing errors later. Register, collect information, set up your system, understand the deductions, enrol in pensions, run your first payroll, and keep records. Use Bizpro Desk to automate as much as possible and you will have a compliant, efficient payroll process that scales as your team grows.