SimpleReturns

Taking on your first employee: the tax side

Reviewed by Lee Jones, Founder · Updated 17 July 2026
The short answer

Hiring your first employee creates three tax jobs: registering as an employer with HMRC before the first payday, paying employer National Insurance of 15% on their pay above £417 a month, and claiming the Employment Allowance, worth up to £10,500 a year off that National Insurance bill, which a company with only a paid director cannot.

Official source. This guide is a plain-English summary of official GOV.UK guidance, not advice. The authoritative source is Register as an employer on gov.uk. Always rely on that over our summary.

What do I have to do before their first payday?

Work through this list in order. None of it is hard, but the order matters because HMRC's letter comes by post.

  1. Check whether your company is already registered as an employer. If you pay yourself a salary through payroll, it already is, and you can skip to step 3. Companies have to register even when the only person they pay is the director. If you only take dividends, or take nothing, you probably are not registered yet. Our guide on paying yourself a salary and dividends explains that setup.
  2. Register as an employer with HMRC. You must do this before the first payday, and you cannot do it more than 2 months before you start paying people. HMRC then posts you an employer PAYE reference. If the letter has not arrived by payday, you can still pay your new person and send HMRC the payroll report once it does.
  3. Get payroll running. Each time you pay someone, payroll software works out the tax and National Insurance and sends HMRC a report of what you paid. Most small companies use simple payroll software for this, and it is a few minutes a month once set up.
  4. Budget for the real cost of the hire, which is the salary plus employer National Insurance. The next section puts numbers on it.
  5. Claim the Employment Allowance through your payroll software once your new employee is on the books. More on this below.

What does an employee really cost?

More than the number on the job advert. On top of the salary, your company pays employer National Insurance of 15% on everything above £417 a month.

Here is a worked example. Say you hire someone at £2,000 a month, which is £24,000 a year:

  • Pay above the threshold: £2,000 minus £417 is £1,583.
  • Employer National Insurance: 15% of £1,583 is about £237 a month.
  • Over a year that is roughly £2,850, so your £24,000 hire really costs the company about £26,850.

That 15% comes out of the company's money, on top of the salary, not out of the employee's pay. Their own tax and National Insurance come off their wages through payroll, which the software handles.

What is the Employment Allowance, and why did my company not qualify before?

The Employment Allowance lets eligible employers knock up to £10,500 a year off their employer National Insurance bill. You claim it through your payroll software, and it works like a running discount: you pay less each payday until the £10,500 is used up or the tax year ends.

Here is the trap that catches single-director companies. The rules say that if your company has only one director, that director must not be the only employee paying the employer National Insurance. In plain English: a company where the only person on the payroll above the threshold is the director cannot claim it. That is most one-person companies, which is why you may never have heard of the allowance.

Hiring your first employee usually changes that. Once your new person is on the payroll and earning above the threshold, the director is no longer the only one, and the company can normally claim. In the example above, the £10,500 allowance is bigger than the £2,850 of employer National Insurance for the year, so the company's employer National Insurance bill on that hire could fall to nothing. A few companies are still excluded, for example if most of your work is for the public sector, so it is worth a quick check of the rules when you claim.

What does this mean for my Company Tax Return?

Everything above is about payroll. There is a second, quieter effect: wages and employer National Insurance are staff costs, a normal business expense that reduces the profit your company pays tax on. At the 19% small profits rate, every £100 of wage costs takes about £19 off the Corporation Tax bill. So the £26,850 hire in our example also shrinks the year's tax bill along the way.

You do not have to do anything clever to get this. The wages simply appear in your company's records as a cost, like rent or software, and the tax return reflects them. Our guide on what your company can claim covers the rest of the expense picture, and how Corporation Tax is calculated shows where the deduction lands.

Common questions

Do I need to register as an employer before hiring?

Yes, before the first payday, and you cannot register more than 2 months before you start paying people. If you already pay yourself a salary through payroll, your company is registered already. HMRC posts you an employer PAYE reference.

How much employer National Insurance will my company pay?

Employer National Insurance is 15% on everything above £417 a month. On a £2,000 a month salary that is 15% of £1,583, about £237 a month, roughly £2,850 a year, on top of the salary.

What is the Employment Allowance?

It lets eligible employers knock up to £10,500 a year off their employer National Insurance bill, claimed through payroll software like a running discount. A company where the only person on the payroll above the threshold is the director cannot claim it, which is why most one-person companies never have.

Do wages reduce my Corporation Tax?

Yes. Wages and employer National Insurance are staff costs, a normal business expense that reduces the profit your company pays tax on. At the 19% small profits rate, every £100 of wage costs takes about £19 off the Corporation Tax bill.

When the year end comes round

SimpleReturns files the Company Tax Return and the accounts for £99, both filings together. The wages and employer National Insurance you have been paying all year show up in your company's bank statement, and we categorise them as staff costs for you, so the deduction is never missed. You answer a few plain-English questions, you check every figure, and it is free to start.

Start your return

Payroll itself is a separate job that your payroll software handles each payday; we pick the story up at the year end, and we say that plainly rather than pretend otherwise.

General guidance, not advice. This guide explains how the rules generally work for small UK limited companies. It isn't tax advice for your specific situation, if you're unsure, check with us or an accountant.