Many limited company directors think hiring an employee simply means running a bigger payroll. In HMRC and legal terms, it means something more specific: taking someone on under your direction and control changes several things about how your company operates, from the insurance you’re required to carry to the tax relief you can claim, none of which applied while you were the only person on the payroll.

One of the most common calls we get from limited company directors across Kent starts the same way. The business has outgrown what one person can manage and the plan is simply to add someone to the existing payroll. What often gets missed is that hiring an employee changes more than the headcount, from insurance obligations you were previously exempt from to National Insurance relief you couldn’t claim before. Here’s what actually changes.

Registering as an employer, or checking your existing PAYE scheme

Many limited company directors already run a PAYE scheme, since taking even a modest salary through the company means registering as an employer with HMRC from the outset. If that’s you, hiring an employee is largely a case of adding them to your existing scheme rather than registering from scratch.

HMRC registration

If you’ve only ever paid yourself through dividends and have no PAYE scheme in place, you’ll need to register online through GOV.UK before your employee’s first payday, and no more than two months in advance. HMRC usually takes around ten working days to post your employer PAYE reference and Accounts Office reference, so allow for this rather than leaving it until the week before payday.

Either way, you’ll need HMRC-recognised payroll software to calculate deductions and report pay to HMRC in real time. Our guide to understanding payroll taxes covers what to expect.

Paying at least the minimum wage

Whatever role you’re recruiting for, you’re legally required to pay at least the National Minimum Wage or National Living Wage. From 1 April 2026, that’s £12.71 an hour for workers aged 21 and over, £10.85 for those aged 18 to 20, and £8.00 for under-18s and most apprentices. Rates are reviewed annually and typically rise each April, so check the current figures before setting a salary, especially if you’re recruiting close to the tax year end.

The agreed salary is only part of the bill. Once you’re hiring an employee, you’ll also need to budget for employer National Insurance, currently charged at 15% on earnings above £5,000 a year. On a £25,000 salary, that works out at roughly £3,000 a year in employer NI alone, on top of the wage itself.

Reducing NI costs

This is where the maths flips in your favour. A company whose only employee paid above the secondary threshold is a sole director can’t claim the Employment Allowance, worth up to £10,500 a year. Taking on a second employee paid above the threshold makes your company eligible to claim it against your whole employer NI bill, including on your own salary, offsetting a meaningful chunk of the extra cost.

Salary, employer NI and pension contributions are all deductible against corporation tax, so the net cost after relief is lower than the headline figure. It’s worth asking your accountant to model the after-tax cost before you commit to an offer. Reviewing your salary and dividend split alongside this is worthwhile too, since the numbers behind your own remuneration may shift once Employment Allowance eligibility changes.

Workplace pensions and auto-enrolment

If your new employee is aged between 22 and State Pension age and earns more than £10,000 a year, you’ll usually need to automatically enrol them into a workplace pension and contribute at least 3% of their qualifying earnings, with the employee contributing a further 5%. Qualifying earnings currently run between £6,240 and £50,270 a year. Staff outside these criteria still have the right to opt in, so you’ll need a scheme in place from day one regardless of who you take on.

The Pensions Regulator expects a declaration of compliance within five months of your employee’s start date, so this isn’t something to leave for later in the year.

Contracts, right to work checks and other legal essentials

Every employee is entitled to a written statement of employment particulars from day one, setting out pay, hours, holiday entitlement and notice periods. You’ll also need to carry out a right to work check before your employee starts and keep evidence of this on file, since the penalties for getting this wrong fall on you as the employer.

Other essentials to have ready include a basic contract of employment and a written process for handling grievances or disciplinary matters, along with health and safety arrangements relevant to your sector. Construction and trades directors should be clear whether the person should be treated as an employee or a subcontractor under the Construction Industry Scheme, as the tax treatment differs significantly between the two.

Insurance you’ll need

This is one of the biggest practical changes for directors. A limited company where the director is the sole employee and owns at least 50% of the shares is exempt from needing employers’ liability insurance. The moment you take on an employee, that exemption falls away completely, whatever their hours or pay. You’ll need at least £5 million of cover from an authorised insurer and can be fined up to £2,500 for every day you’re without it. Most policies offer £10 million as standard, so it’s worth comparing rather than assuming the legal minimum is your only option.

Your first hire checklist

☐  Check whether you already have a PAYE scheme, or register as an employer

☐  Choose HMRC-recognised payroll software

☐  Confirm the correct minimum wage rate for your employee’s age

☐  Work out the true cost after Employment Allowance and corporation tax relief

☐  Check whether auto-enrolment applies and set up a pension scheme

☐  Prepare a written statement of employment and a contract

☐  Carry out a right to work check

☐  Arrange employers’ liability insurance, no longer exempt once you have staff

Getting help hiring an employee

Hiring an employee for the first time as a limited company director brings extra admin, but none of it is unmanageable with the right preparation. Getting your PAYE scheme, insurance and paperwork right from the outset often uncovers reliefs you weren’t previously eligible for.

If you’re planning to take on your first member of staff, contact Adams Accountancy for a free, no-obligation chat about setting up payroll and staying compliant from day one, or call us on 01322 250001. As always, no question is too silly when it comes to growing your business.

 

About the author

Michelle Adams is a qualified accountant and director at Adams Accountancy, a friendly accountancy practice based in Bexley. Our staff have huge experience helping limited company directors across Kent and beyond. Michelle specialises in guiding growing businesses through the practical, legal and tax steps of taking on their first member of staff.

Frequently asked questions

Do I need to register as an employer if I already pay myself a salary through PAYE?

If you already run a PAYE scheme to pay yourself a salary, you don’t need to register again, you simply add your new employee to the existing scheme. If you’ve only ever paid yourself through dividends, you’ll need to register as an employer with HMRC before your employee’s first payday.

Do I still need employers’ liability insurance if I already have public liability cover?

Yes, employers’ liability insurance is a separate legal requirement covering claims from staff injured or made ill through their work, which public liability cover doesn’t include. As a sole director you may have been exempt, but that exemption ends the moment you take on an employee.

Can I claim the Employment Allowance once I take on an employee?

Sole-director companies with no other staff paid above the secondary threshold can’t claim the Employment Allowance, but taking on an employee paid above that threshold makes your company eligible. It’s worth up to £10,500 a year against your employer National Insurance bill, including on your own salary.

Does hiring an employee change how I should pay myself?

Not directly, but it’s worth reviewing your salary and dividend split once your employer NI position and Employment Allowance eligibility change, since the numbers behind your own remuneration may shift. It’s a good opportunity to check the split is still the most tax-efficient option for you.