Hiring your first employee in London: the real cost

The hourly rate is what you agree with the person you hire. It is not what they cost you. Before the first payday, a business taking on its first employee has to register with HMRC, pay at least the legal minimum, add employer National Insurance and, for most staff, a pension contribution.

One of those steps can also save a small company money, and it is easy to leave unclaimed.

Register before the first payday

You must register as an employer before the first payday, and HMRC sends your PAYE reference by letter. You cannot register more than two months before you start paying people, so the first pay date sets the timing. Start registering as an employer as soon as the first payday is within two months.

You must register if an employee is paid £96 or more a week. You must also register, whatever the pay, if they get expenses or benefits, are getting a pension, have had another job, or have received Jobseeker's Allowance, Employment and Support Allowance or Incapacity Benefit. If you do not need to register, you still keep payroll records.

If you already pay yourself a salary through your own limited company, you may already be registered. gov.uk is explicit that a sole director employing only themselves must register too.

The legal minimum, and London's voluntary one

From 1 April 2026 the legal minimum hourly rates are:

• £12.71 for workers aged 21 and over (the National Living Wage);

• £10.85 for those aged 18 to 20;

• £8.00 for under 18s;

• £8.00 for apprentices, but only if they are under 19 or in the first year of their apprenticeship.

That apprentice condition is easy to miss. An apprentice aged 21 moves from £8.00 to £12.71 once their first year is complete, on the anniversary rather than on 1 April.

Some London employers choose to pay the London Living Wage. It is a voluntary rate set independently of government. Paying it is a choice; the rates above are the law.

Employer National Insurance, and the allowance that can cancel it

Employer National Insurance is 15 per cent on earnings above £5,000 a year, which is £96 a week.

The Employment Allowance takes up to £10,500 a year off your bill. There is a catch for one-person companies: if the company has only one director, that director must not be the only employee liable for employer National Insurance. Until you hire, a sole-director company usually cannot claim it. Taking on an employee paid above the threshold can change that. If you have connected companies, only one in the group can claim. There is more on employer National Insurance and the Employment Allowance for 2026/27.

In my view the tax system does not support small businesses, and hiring is where you feel it. Employer National Insurance was 13.8 per cent above £9,100 a year in 2024/25. It is now 15 per cent above £5,000. That is a really big hit for a small employer.

Workplace pensions

All employers must provide a workplace pension scheme. You must automatically enrol a worker who is aged between 22 and State Pension age, earns at least £10,000 a year and usually works in the UK.

In most schemes, contributions are worked out on earnings between £6,240 and £50,270 a year. The legal minimum is 8 per cent in total, of which the employer pays at least 3 per cent. £10,000 decides who is enrolled; £6,240 is where contributions start.

A café's first hire, costed

Illustration, not a real client. A café in Walthamstow, run as a limited company with one director, hires a 25-year-old for 30 hours a week at £12.71 an hour.

• Pay is £381.30 a week, or £19,827.60 a year, so the café must register for PAYE.

• Employer National Insurance is 15 per cent of £14,827.60, which is £2,224.14 a year.

• The employer pension contribution is 3 per cent of £13,587.60, which is £407.63. The employee's 5 per cent, £679.38 including tax relief, comes from their pay.

Without the Employment Allowance, the year costs £22,459.37. With it, the allowance covers the whole £2,224.14 and the cost falls to £20,235.23.

Before the first payday

1. Register as an employer, no more than two months before you first pay anyone.

2. Take out employers' liability insurance with at least £5 million of cover. It is a legal requirement from your first hire, with only narrow exemptions.

3. Confirm the person's age and the right minimum rate, and diary any apprentice anniversary.

4. Check whether the hire makes your company eligible for the Employment Allowance, and claim it if so.

5. Set up the pension scheme and work out whether they must be enrolled.

6. Price the whole package before you make the offer.

For a one-director company, the first hire can open the door to up to £10,500 of relief. Cost it properly before you agree the rate.

About the author

Harvey Dhillon is the founder and CEO of Zmartly, a UK accountancy firm for small businesses. He grew up in West London and worked in finance roles in investment banking, wealth management and private equity, starting at Barclays, before leaving in 2020 to build the firm. He is a Chartered Management Accountant (ACMA, CGMA).

Featured photo by Peter Wilkinson on Unsplash.