The Employer Threshold: Nine Decisions to Settle Before the First Payslip

The first hire is rarely presented as a legal event. It arrives disguised as a resourcing problem: the workload has outgrown the founder, or a particular skill is missing, and the answer appears to be a person. By the time the offer letter is drafted, the company has already become an employer in all but name. Obligations attach from the day work begins, and several of them must be discharged before that day.

The nine decisions below are deliberately ordered so that the ones with long lead times come first. None of them is difficult. All of them are considerably harder to unpick after the first payroll run.

1. Employment status, settled before the advert

Status is a question of fact, not of labelling. Control, substitution, mutuality of obligation and the reality of the working arrangement determine whether someone is an employee, a worker or genuinely self-employed. A contractor who works set hours, takes direction and cannot send a replacement is unlikely to be self-employed in substance, whatever the invoice says. The risk sits with the engager: unpaid PAYE, interest and penalties, and the possibility of a tribunal claim from someone the company always treated as external. Decide the shape of the engagement before the advert is written, because the advert sets expectations that are hard to row back.

2. Employer's liability insurance

This is compulsory, must be in force from the first day of employment, and must cover at least £5 million. Confirm that the policy actually describes the activities the business performs, and that it is not a renewal of a policy written for a smaller operation. Check the certificate is available to employees, as required. If the company holds professional indemnity or directors' and officers' cover, ask the broker whether adding staff changes any warranty or notification condition.

3. Auto-enrolment

Pension duties begin with the first eligible jobholder. Choose a scheme and confirm its staging and joining mechanics before the hire starts. A postponement of up to three months is permitted, but it must be operated deliberately rather than assumed. Contributions must total 8 per cent of qualifying earnings, of which at least 3 per cent comes from the employer. Decide early whether the scheme will use the statutory qualifying earnings band or a more generous definition of pensionable pay; the second is easier to explain to staff and harder to change later. The declaration of compliance has a fixed deadline and does not wait for a quiet month.

4. The employment allowance

A company whose only paid employee is a sole director cannot usually claim the allowance. The moment a genuine second employee appears, that position changes, and the allowance — £10,500 at the time of writing, subject to confirmation — can absorb a substantial part of the first year's employer National Insurance. Confirm eligibility with the payroll software or adviser before the cost model is built, because it materially changes the arithmetic of the hire.

5. Right-to-work checks

Carry out the check before employment begins, not on the first morning. Follow current Home Office guidance precisely, retain the prescribed evidence in the prescribed form, and diarise repeat checks where permission is time-limited. Civil penalties for employing someone without the right to work have risen sharply in recent years; the cost of a properly recorded check is measured in minutes.

6. Probation, notice and the written statement

The written statement of particulars must be given on or before the first day of employment. A probationary period is a useful device for setting expectations and shortening notice, but it does not create a zone in which process can be ignored. Set the probation length, the notice during probation and the notice afterwards as three separate numbers, and make sure the contract is internally consistent about them.

7. Holiday and sick pay mechanics

Statutory holiday is 5.6 weeks, which may include bank holidays, pro-rated for part-time staff and accrued for part-year workers. Calculate it in hours for anyone whose days vary. Holiday pay for irregular hours requires a reference period, and rolled-up pay is only lawful in defined circumstances. On sick pay, the rules have been under reform; confirm the position in force at the date of the hire rather than relying on last year's guidance. Whatever the mechanics, write down who records absence and how it reaches payroll.

8. Payroll software and RTI

Register as an employer with HMRC in good time before the first payday, then select payroll software that supports Full Payment Submissions. The submission is due on or before each payday; there is no grace period worth relying on. Payslips must be itemised for all employees, leavers need P45s and everyone needs a P60 at year end. Records should be kept for at least three years, and longer in practice.

9. The true monthly cost

Add employer National Insurance, employer pension contributions, insurance, software and any benefits to the headline salary. On a £30,000 salary the total lands at roughly £34,500 at current rates — around 15 per cent above the number in the offer letter. Multiply by twelve before deciding whether the role is affordable, and decide whether the hire is permanent, fixed-term or a trial with a defined review.

Doing it in one sitting

Work through the nine in this order: status, insurance, pension scheme and PAYE registration, right-to-work process, contract and statement, payroll software, then the cost model. The longest lead times sit in the middle of that list, which is why they come before the recruitment itself.

The mistake that recurs most often in a first year of employment is treating payroll as a monthly administrative chore rather than a compliance calendar. It is a calendar. The dates are fixed, the penalties are automatic, and the director who owns them is the one who signed the contract.