Taking on your first employee — or managing a growing payroll — brings a series of HMRC obligations that are easy to get wrong and expensive to correct. This 2026/27 guide covers everything UK employers need to know: PAYE rates, employer NIC, the Employment Allowance, P11D benefits, auto-enrolment and the key deadlines.
Employer National Insurance is 15% on earnings above the £5,000 secondary threshold from April 2026 (up from 13.8%). The Employment Allowance is £10,500. Auto-enrolment minimums remain 3% employer / 5% employee, and the National Living Wage is £12.71 (over-21s, from April 2026). RTI filings are due on or before each pay date — late submissions trigger automatic penalties.
Setting Up as an Employer
Before paying your first employee, you must register as an employer with HMRC. HMRC will send you a PAYE reference and an Accounts Office reference — both are needed for payroll submissions and payments.
📋 Employer Registration Checklist
- Register as an employer with HMRC — can be done online via GOV.UK
- Set up payroll software (Xero Payroll, Sage, BrightPay or HMRC’s free Basic PAYE Tools for up to 9 employees)
- Collect a P45 (or complete a starter checklist) for each new employee
- Set up auto-enrolment — identify your staging date and choose a pension scheme
- Issue a written statement of employment particulars on or before day one (legal requirement since April 2020)
Employer NIC Rates 2026/27
| Description | Rate | Threshold |
|---|---|---|
| Employer Class 1 NIC (standard) | 15% | Above £5,000/year Secondary Threshold |
| Employee Class 1 NIC | 8% | £12,570–£50,270 (12% historic, reduced April 2024) |
| Employee Class 1 NIC (higher earnings) | 2% | Above £50,270 |
| Class 1A NIC on benefits in kind | 15% | On P11D value of benefits |
⚠️ Employer NIC Rate Increased in April 2025
The employer NIC rate increased from 13.8% to 15% and the Secondary Threshold dropped from £9,100 to £5,000 from April 2025. For a full-time employee on £30,000, this increased the employer NIC bill by approximately £1,500 per year.
Employment Allowance 2026/27
Eligible employers can reduce their Class 1 NIC liability by up to £10,500 per year (increased from £5,000 in April 2025).
📋 Employment Allowance — Who Qualifies
- Most employers with a Class 1 NIC liability under £100,000 in the previous tax year
- Not available to companies where the director is the sole employee
- Claimed through your payroll software on the Employer Payment Summary (EPS)
- Claim each tax year — it doesn’t carry over automatically
Outsource Your Payroll
Full RTI payroll, pension auto-enrolment and P11D — from £25/employee/month.
Benefits in Kind and P11D
When you provide benefits to employees — company cars, health insurance, interest-free loans above £10,000, gym memberships — these are Benefit in Kind (BIK). The employee pays income tax on the BIK value; the employer pays Class 1A NIC at 15%.
📋 P11D Deadlines
- 6 July 2026: P11D forms submitted to HMRC for 2025/26 tax year
- 6 July 2026: Copy of P11D provided to each employee
- 19 July 2026: Class 1A NIC payment (cheque)
- 22 July 2026: Class 1A NIC payment (electronic — BACS)
💡 Payrolling Benefits — Avoid the P11D
Employers can elect to payroll benefits — reporting them through the payroll in real time and collecting income tax through PAYE rather than via P11D. This eliminates the P11D process entirely for payrolled benefits and ensures employees don’t receive unexpected tax adjustments through their tax code. Register with HMRC before the start of the tax year.
Auto-Enrolment 2026/27
Auto-enrolment requires employers to automatically enrol eligible workers into a qualifying pension scheme. Minimum total contributions: 8% of qualifying earnings (at least 3% from employer).
📋 Auto-Enrolment Key Points
- Eligible workers: aged 22 to state pension age, earning above £10,000 per year
- Non-eligible workers (18–21 or below £10,000): can opt in — you must then contribute
- Workers can opt out within one month — you must refund their contributions
- Re-enrol every 3 years — you must re-assess and re-enrol opted-out workers
- The Pensions Regulator can issue compliance notices and fines for non-compliance
Key Payroll Deadlines
| Date | Action Required |
|---|---|
| On or before each payday | Full Payment Submission (FPS) to HMRC |
| 19th of each month | PAYE/NIC payment to HMRC (22nd if electronic) |
| 31 May | P60 issued to all employees |
| 6 July | P11D submitted to HMRC |
| 22 July | Class 1A NIC paid electronically |
Worked Examples: What Employing Someone Actually Costs
The headline gross salary tells only part of the story. The true cost of employment for an employer in 2026/27 includes employer NIC (15% above the £5,000 secondary threshold, after Autumn 2024 changes), employer pension contributions (minimum 3% under auto-enrolment), the apprenticeship levy if applicable, and either statutory or company-provided benefits. The examples below show the full picture at three salary levels.
Example 1: First employee at £30,000
A small business hires its first employee on £30,000 gross salary in 2026/27. Employer cost breakdown:
- Gross salary: £30,000
- Employer NIC (15% on £30,000 − £5,000 = £25,000): £3,750
- Employer pension at 3% on qualifying earnings (£30,000 − £6,240 = £23,760): £713
- Employment Allowance offset (if qualifying): up to £10,500 of employer NIC, which fully covers the £3,750 here
- True employer cost (with EA): £30,713
- True employer cost (without EA): £34,463
The £10,500 Employment Allowance is therefore worth £3,750 to a first-employee employer at this salary level — nearly a full month’s pay. Don’t forget to claim it.
Example 2: Mid-level employee at £55,000
A growing business hires a mid-level professional at £55,000:
- Gross salary: £55,000
- Employer NIC (15% on £55,000 − £5,000 = £50,000): £7,500
- Employer pension at 3% on qualifying earnings (capped at upper limit £50,270 − £6,240 = £44,030): £1,321
- Private medical insurance benefit (if provided, ~£800/year): £800, generating Class 1A NI of £120
- True employer cost: £64,741
The “loaded” cost is roughly 18% above gross salary. Many small business owners forget this when modelling whether to hire — the real budget needs to be at least 1.18× gross.
Example 3: Director salary at £14,500 (optimised)
An owner-director takes the tax-optimised salary of £14,500 (above the LEL to maintain NIC qualifying year, but just at the personal allowance):
- Director’s salary: £14,500
- Director’s income tax: £0 (covered by personal allowance)
- Director’s NIC: £0 (below the £12,570 primary threshold’s effective application for directors)
- Employer NIC at 15% on £9,500: £1,425
- Employment Allowance: NOT available to single-director companies with no other employees
- True cost for the salary: £15,925
For a single-director company with no other employees, the optimised salary level is now typically £6,500–£9,500 rather than the older £12,570 figure — the loss of the Employment Allowance and the lowered secondary threshold have shifted the maths. Get current-year modelling rather than copying a setup from 2022/23.
Common Employer Tax Mistakes
1. Missing the Employment Allowance claim
The £10,500 Employment Allowance must be claimed annually via the Employer Payment Summary (EPS). It is not automatic. Most payroll software has a tick-box to make the claim, but a surprising number of small businesses miss this — particularly those running payroll themselves without specialist software. The lost cash is real: £10,500 of employer NIC saved is direct profit. Claims can be backdated up to 4 tax years, so it’s worth reviewing your historical EPS submissions.
2. Single-director company claiming Employment Allowance
The Employment Allowance is not available if the only employee paid above the secondary threshold is also a director and the company has no other employees. Many single-director companies have wrongly claimed the allowance, sometimes for multiple years. HMRC has been clawing this back with interest. The fix: either accept that single-director companies don’t get the allowance, or hire a second employee (often a spouse on a genuine commercial wage) to unlock it.
3. Misclassifying a contractor as self-employed
If a contractor working for you in 2026/27 should genuinely be employed (because of supervision, direction or control; mutuality of obligation; integration into the business; equipment provided by you), HMRC can reclassify them and recover the employer NIC plus penalties for up to 6 years. The risk has increased substantially since the off-payroll working rules tightened. For any contractor relationship that smells employed, get a status determination done and documented before the engagement starts, not after HMRC arrives.
4. Missing P11D filing deadline
P11Ds are due by 6 July following the tax year. Late filing penalties start at £100 per 50 employees per month. From April 2026, voluntary payrolling of benefits (including company cars from April 2027) is being phased in — but until you opt in, the P11D remains the default route. Don’t assume payroll software automatically handles P11D — many don’t, or only handle some benefit categories. Check before tax year-end.
5. Forgetting the auto-enrolment three-yearly re-enrolment
Auto-enrolment isn’t a one-time setup. Every 3 years employers must “re-enrol” any employees who previously opted out, plus complete a re-declaration of compliance to The Pensions Regulator. Missing the re-enrolment cycle can trigger compliance penalties and back-dated contribution requirements. Set a calendar reminder for the 3-year anniversary of your staging date.
6. Not running a payroll at all because “we don’t pay anyone”
A common error among micro-businesses: the director takes only dividends, no salary, so “we don’t need PAYE.” If the company has the director on the payroll at any level above the LEL (£6,396 in 2025/26 — verify 2026/27 figure when set), they need to be registered for PAYE and file RTI submissions. The £0-salary route is theoretically clean — but most directors benefit from a salary at the optimised level for NIC qualifying-year purposes, which requires payroll.
Frequently Asked Questions
Do I need a payroll if I only employ my spouse?
Yes — if you pay your spouse at any level above the Lower Earnings Limit, you need to register as an employer, run a PAYE scheme, and file RTI submissions. The wage must also be commercially justifiable based on the work actually done. HMRC routinely challenges excessive spousal salaries where the work doesn’t support the level. Document the role, hours, and duties.
What’s the minimum I need to pay an employee?
The National Living Wage (workers aged 21+) is £12.71 per hour from 1 April 2026 (up from £12.21), with 18–20 year olds on £10.85 and 16–17 year olds and apprentices on £8.00. Below this is illegal. National Minimum Wage rates apply for younger workers and apprentices at lower rates. Salary-sacrifice schemes (e.g. for pension or cycle-to-work) cannot reduce pay below the NMW level.
Should I be running payroll in-house or outsourcing it?
For under 5 employees, in-house payroll using cloud software (Xero Payroll, FreeAgent Payroll, BrightPay) is typically practical. The annual cost of doing it yourself is mostly time. For 5+ employees, complications creep in — variable hours, statutory sick/maternity pay, NI codes, pension auto-enrolment cycles, P11D items, multiple pay schedules — and outsourcing typically pays for itself by removing payroll-administrator-time and compliance risk. A typical outsourced payroll for 10 staff costs £80–£150 per month including auto-enrolment.
What if I get an HMRC PAYE inspection?
HMRC PAYE compliance reviews focus on: employee status (especially contractor reclassification risk), benefits-in-kind reporting accuracy, expense reimbursements (genuine business expenses vs disguised salary), and payroll-record completeness. Have ready: 6 years of payroll records, employment contracts, expense policies, P11D returns, EPS submissions evidencing the Employment Allowance claim, and status determinations for any contractors. The review typically takes 1–3 months and any underpaid tax/NI is recovered with interest and penalties of 0–30%.
Can I pay a director by bonus and no salary?
Yes, but the bonus is treated as employment income and subject to PAYE/NIC at the point of payment. The choice between regular salary and lump-sum bonus typically doesn’t change the tax — both are taxed as employment income — but it affects timing of cash flow and pension contribution mechanics. For most owner-directors, a small regular salary plus dividends remains more tax-efficient than salary-only.
What’s coming under MTD for payroll?
RTI submissions (Real Time Information) have been mandatory for all PAYE schemes since 2013 — payroll information is already submitted to HMRC every time you pay employees. From April 2026, voluntary payrolling of most benefits-in-kind begins phasing in to remove the P11D step for participating employers. Full mandatory payrolling of all benefits including company cars is expected to follow from April 2027 onwards, on a phased basis. Keep payroll software up to date and ask your payroll provider about timeline for adopting voluntary payrolling.
How do I handle statutory payments — SSP, SMP, SPP?
Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), Statutory Paternity Pay (SPP), Statutory Adoption Pay and Statutory Shared Parental Pay are all paid through payroll alongside regular wages. Modern payroll software handles the rates and timing automatically. Employers can recover most of SMP/SPP/SAP through the Small Employers’ Relief if total annual NI bill is under £45,000 — but SSP is not recoverable except in narrow cases. Get the recovery claim right at year-end via the EPS submission — the cash recovery can be significant for businesses with multiple parental leave periods.
What about apprentices and the Apprenticeship Levy?
The Apprenticeship Levy is payable by employers with a total annual pay bill above £3 million at 0.5% of the pay bill above that threshold. For most SMEs the levy doesn’t apply, but the 95% government co-funding for apprenticeships at non-levy-paying employers does — meaning hiring an apprentice can be substantially subsidised. Apprentices on approved schemes are also exempt from employer NIC up to the Apprentice Upper Secondary Threshold (£967/week), which is a substantial saving on apprentice wages.
Do I need employer’s liability insurance?
Yes — Employers’ Liability Insurance is a legal requirement for almost all UK employers from the first day of employing someone. Minimum cover £5 million. Penalties for not having cover are £2,500 per day. The policy must be displayed (or available digitally) and certificates retained for 40 years. This is separate from payroll/tax but routinely overlooked by new employers. A standard policy for a small business with 5–10 employees typically costs £100–£300 per year depending on sector, and the policy almost always bundles in public liability cover which most businesses also need. The 40-year retention rule exists because industrial disease claims (asbestos, noise-induced hearing loss, repetitive strain) can be brought decades after the employment ended — so don’t throw old certificates away when the policy renews or the business changes insurer.
✅ Key Takeaways — Employer Tax 2026/27
- Employer NIC is now 15% above £5,000 — significantly higher than 2024/25
- The £10,500 Employment Allowance must be claimed each year — don’t forget to claim it
- P11D must be filed by 6 July — Class 1A NIC paid by 22 July
- Consider payrolling benefits to eliminate the P11D process entirely
- Auto-enrolment re-enrolment every 3 years is a legal requirement — check your re-enrolment date
📚 Related reading
- Offshore Accounting & Outsourcing Guide — Hiring UK employees costs 15% in employer NIC alone — outsourcing payroll-light functions offshore can dramatically cut total cost.
- PAYE Settlement Agreements 2026/27 — PSAs let employers settle income tax and NIC on minor benefits in one annual payment — full mechanics.
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