Hiring your first employee is a big moment. It can be the start of new capacity, better service or even just a chance to step back from doing everything yourself. But taking someone on through PAYE brings responsibilities (and hidden costs!) that are easy to underestimate.
This post walks through what PAYE really involves, what it costs and what your options are if you’re not sure employment is the right route just yet.
PAYE Means More Than Just Paying a Wage
If you’re employing someone (rather than using a freelancer or contractor), you’ll need to run PAYE through HMRC. That means:
• Registering as an employer
• Running payroll each month
• Deducting tax and employee National Insurance
• Paying employer NI and pension contributions
• Issuing payslips and year-end summaries (like P60s)
• Managing auto-enrolment into a workplace pension
Even with just one employee, these rules apply. Most small businesses use an accountant or payroll provider to handle the admin, but it’s still your legal duty to make sure it’s done right.
What makes up the true cost of employment?
When you agree to pay someone their hourly rate, that’s just their gross wage. But as an employer, you’re also responsible for several extra costs:
• Employer’s National Insurance – set at 15% for 2025/26 and paid on top of the employee’s wage
• Pension Auto-Enrolment (covered later) – you must pay at least 3% of their qualifying earnings
• Holiday pay– employees are entitled to 5.6 weeks of paid holiday per year, or 12.07% extra on top of their hourly rate
Alongside these direct costs, there are also other costs such as payroll software or accountant fees, setup admin, sick pay, training time and covering any periods of absence.
Each of these adds to your overall cost and together they can push your real hourly rate significantly higher than what’s shown on the payslip!
A Simplified Hourly Example
Let’s break it down for someone earning £20 per hour:
• First you start with their hourly rate - £20.00
• Then you need to add 15% for Employers NI - £3.00
• Next comes 3% for the Pension - £0.60
• Finally, you need to add 12.07% holiday pay - £2.41
This leaves us with a Total Cost to Employ of - £26.01
Note: This is a simplified example based on flat 2025/26 rates and assumes no thresholds or allowances. Actual costs may vary depending on contract terms and employee earnings.
So while your employee earns £20ph, your real cost is just over £26ph, or about 30% more once you include legal obligations. This is a useful figure to keep in mind when you’re planning staffing costs or comparing options!
What About Auto-Enrolment?
As soon as you take on an eligible employee, you’ll need to enrol them in a workplace pension and make contributions.
• The minimum employer contribution is 3%, based on the employee’s earnings
• You’ll also need to handle opt-outs, re-enrolment every three years, and submit reports to your pension provider
• Common providers for small businesses include NEST and The People’s Pension, both of which integrate with most payroll software
Even if your team is small, these duties still apply. Missing them can lead to fines, so it’s worth getting support early.
Are There Alternatives to PAYE?
Yes, but they need to be used carefully!
Freelancers or contractors can be a good option for flexible or short-term work. They manage their own tax, so you don’t need to operate PAYE. But they must be genuinely self-employed by choosing their own hours, working for multiple clients and using their own tools.
If someone works regular hours under your direction and control, they could count as an employee, even if you call them something else. In that case, PAYE is the correct route.
Some businesses also use casual or zero-hours contracts. These still fall under PAYE rules, but allow more flexibility on hours worked.
Final Thought
Hiring someone through PAYE can absolutely be the right move as it’s a sign your business is growing. But it’s important to go into it with eyes open. Between admin, pensions and employer NI, it’s easy to underestimate what’s involved.
The good news? Once you understand the costs and get the right setup, it becomes a manageable part of running a business. And with the right support, you can stay compliant, stay on top of payroll and focus on the value that new team member brings.
So if you’re planning to take someone on, or just want to understand whether PAYE is the right step for your business, book a free discovery call. We’ll go through your situation and help you plan with confidence!
