What to Do When Hiring a New Employee

When you take on a new employee, there are several essential steps you must complete to stay compliant with HMRC and ensure your employee is paid correctly. This article walks you through the key requirements, from collecting the right paperwork to reporting to HMRC and setting up payroll records.

Check if you need to operate PAYE

Before taking on a new worker, you need to determine whether they're an employee or self-employed. This matters because you only operate PAYE (Pay As You Earn) for employees.

You must pay someone through PAYE if they earn £129 or more a week (£559 a month or £6,708 a year). Self-employed workers are not paid through PAYE.

As a general rule, someone is employed if they work for you and do not have the risks associated with running a business. They're self-employed if they run their own business and are responsible for its success or failure.

Check each worker's employment status carefully. If you get it wrong, you may have to pay extra tax, National Insurance, interest and a penalty.

Special cases

For temporary workers you pay directly, operate PAYE as long as they're classed as an employee. If an agency pays them, you don't need to operate PAYE unless the agency is based abroad and does not have a UK trading address or representative.

If you only pay an employee once, there are different rules. Set up a payroll record with their full name and address, use tax code '0T' on a 'Week 1' or 'Month 1' basis, and put 'IO' in the 'Pay frequency' field when you send your Full Payment Submission (FPS). Don't include a start or leaving date, and give them a payslip or letter showing their pay and deductions rather than a P45.

For volunteers who only receive expenses that are not subject to tax or National Insurance, you don't need to operate PAYE. Students should be treated the same way as other employees.

Collect employee information

You need specific information from your new employee to set them up correctly on your payroll system and work out their tax code.

Information from a P45

Ideally, your employee will give you a P45 from their previous employer. The P45 is a document showing their employment and tax details from their last job. If they stopped receiving Employment and Support Allowance, Jobseeker's Allowance or Incapacity Benefit, they'll get a P45 from Jobcentre Plus.

From the P45, you'll need:

• Full name
• Leaving date from their last job
• Total pay and tax paid to date for the current tax year
• Student loan deduction status
• National Insurance number
• Existing tax code

You'll also need to collect:

• Date of birth
• Gender
• Full address
• Start date with your company

If your employee has more than one P45, use the one with the latest date. If they have the same leaving date, use the P45 with the highest tax-free allowance and give the other back to the employee.

Using the starter checklist

If your employee doesn't have a P45, or if they left their last job before 6 April 2025, ask them to complete a starter checklist. This replaced the old P46 form.

The starter checklist is used to:

• Add the employee to your payroll system
• Work out their tax code on their first pay
• Calculate how much tax to deduct from their pay
• Work out student or postgraduate loan deductions
• Let HMRC know they've started working for you

The employee will need to know:

• Whether they've had another job or pension since 6 April
• Their National Insurance number
• The start date of their new job
• If they have a student or postgraduate loan, which plan they're on
• If they've had Employment and Support Allowance, Jobseeker's Allowance, Incapacity Benefit or Universal Credit since 6 April
• Their passport number (if they've been sent to work in the UK temporarily)

Your employee can complete the starter checklist online or print it out. They should complete it carefully, as errors may result in paying too much or too little tax. Once completed, they should email, post or give it to you.

Set up student loan deductions

You must make student loan deductions if:

• The employee's P45 shows that deductions should continue
• The employee tells you they're repaying a student loan or postgraduate loan (for example, on their starter checklist)
• HMRC sends you form SL1 or form PGL1 and your employee earns over the income threshold for their loan

Even if your employee has a P45, ask them if they have a student loan or postgraduate loan (they may have both). If they finished their studies after 6 April in the current tax year, they won't start repaying until the next tax year.

If your employee has a student loan, ask them to sign in to their repayment account and check which plan to use for deductions. If they cannot tell you, use Plan 5 in your payroll software until you receive a student loan start notice (SL1).

If they have more than one plan and you don't know which is in repayment, start deductions for the plan with the lowest recovery threshold until you get an SL1.

You can only deduct one student loan plan type at a time, but you can deduct a postgraduate loan at the same time as a student loan. Your payroll software will calculate the deductions for you.

HMRC will send you form SL2 (for student loans) or form PGL2 (for postgraduate loans) if you need to stop making deductions. Don't stop deductions simply because an employee asks you to.

Set up payroll records and work out the tax code

Use all the information you've collected to set up your new employee in your payroll software. You can use HMRC's online tool to work out their tax code and starter declaration.

You must keep this information in your payroll records for the current year and the three following tax years.

Register the employee with HMRC

You must register your new employee with HMRC by including their details on a Full Payment Submission (FPS) the first time you pay them. This is how you tell HMRC that you've taken on a new employee.

You must also follow the same steps as when you employ anyone, such as checking they have the right to work in the UK.

Sources

• Starter checklist if you're starting a new job
• Tell HMRC about a new employee

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.