HR and payroll for startups in the United Kingdom
Reviewed by Mellow Editorial Team, HR & payroll content team
Running HR and payroll correctly from your first hire protects you from penalties, builds trust with employees, and avoids costly corrections later. For UK startups, the foundations are straightforward — but they need to be set up in the right order.
Register as an employer before you pay anyone
Before your first employee receives a penny, you must register as an employer with HMRC. Do this at least two weeks before your first payday. HMRC will issue you a PAYE reference number, which you need to run payroll and make submissions.
You also need to set up a payroll system that supports Real Time Information (RTI). Under RTI, you submit a Full Payment Submission (FPS) to HMRC on or before every payday — not monthly, not after the fact. Late or missing submissions trigger automatic penalties, so getting your payroll software configured correctly before day one matters.
If you use an accountant or payroll bureau, make sure they are registered as an agent with HMRC and that you understand who is responsible for submissions. The legal obligation stays with you as the employer.
Understand what you owe on top of salary
Many first-time founders are surprised by the employer costs that sit on top of a salary offer. For every employee, you pay employer National Insurance at 13.8% on earnings above the secondary threshold (category A employees). That is a significant addition to your payroll costs and should be built into your hiring budget from the start.
Employees pay their own NI at 8% up to the upper earnings limit, then 2% above it, and income tax under PAYE — starting with a personal allowance of £12,570, then 20% basic rate, 40% higher rate, and 45% additional rate. Your payroll software calculates these deductions automatically, but understanding the structure helps you have honest conversations about take-home pay.
You are also required to auto-enrol eligible workers into a pension scheme. The minimum contributions are 3% from you as the employer and 5% from the employee, applied to qualifying earnings. You must assess each worker's eligibility and enrol them within the statutory deadline. Failing to set up a compliant scheme is one of the most common oversights in early-stage businesses.
Get your employment contracts right from day one
The Employment Rights Act 2025 strengthens day-one rights for workers, which means the legal baseline your contracts must meet is higher than it was even recently. Employees are entitled to a written statement of particulars on or before their first day — not within two months, as older practice sometimes assumed.
At minimum, contracts should cover: job title and duties, salary and pay frequency, working hours, holiday entitlement, notice periods, and any probationary terms. On holiday: employees working five days a week are entitled to 5.6 weeks of statutory annual leave — 28 days including bank holidays. Part-time and irregular-hours workers accrue leave proportionally.
Do not copy a contract template from a generic source without checking it reflects current UK law. Contracts that contradict statutory rights are unenforceable in the employee's favour, and you remain liable regardless.
Build your people processes early, not once you have a problem
Startups often delay HR processes until something goes wrong — a dispute, a resignation, a subject access request. That is the most expensive time to build them.
A few processes worth implementing from your first handful of hires:
Onboarding. A consistent onboarding process reduces early turnover. It does not need to be elaborate — a checklist covering right-to-work checks, equipment, system access, and an introduction to how the team works is sufficient.
Right-to-work checks. These are a legal requirement before employment starts. Keep records of the documents you checked and when. Digital identity verification services are now available for certain document types.
Absence and leave tracking. Even with three employees, informal tracking creates disputes. A simple shared system prevents ambiguity about holiday balances and sick leave. Statutory Sick Pay and statutory family leave payments apply regardless of company size.
Performance and conduct. You need a basic disciplinary and grievance procedure. ACAS provides a statutory code that tribunals will take into account if a dispute arises. Following a fair process is as important as the outcome.
Keep payroll records and meet your year-end obligations
Payroll administration does not end with running each pay cycle. You must issue a P60 to every employee by 31 May after each tax year ends. If you provide benefits in kind — private health insurance, gym memberships, company cars — you need to report them on a P11D by 6 July and pay any Class 1A National Insurance due.
Keep payroll records for at least three years after the tax year they relate to. HMRC can open a PAYE compliance review at any point, and incomplete records significantly complicate your position.
If you are offering equity, share options, or non-cash benefits as part of your compensation package — common in startups — take advice on the tax treatment before you commit. HMRC has specific schemes such as EMI that provide tax advantages, but they require correct setup and registration to be valid.
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