Hiring employees: Your step-by-step guide for UK businesses

Published Monday 5 January 2026

Table of contents

• Budget for your first hire
• Plan your recruitment approach
• Understand your obligations as an employer
• Set up a payroll system
• Keep track of key dates and tasks
• Understand the rights of your employees
• Keep a file for each employee
• Onboard your new employee effectively
• Make hiring work for your business
• FAQs on hiring employees

Key takeaways

• Budget comprehensively for your first hire by accounting for National Insurance contributions, pension contributions, recruitment costs, office space, equipment, training time, and potential bonuses beyond just the base salary.
• Obtain mandatory employers' liability insurance with minimum £5 million coverage from your first day as an employer, as failing to maintain this protection can result in criminal charges and daily fines of £2,500.
• Establish clear expectations and responsibilities for both employer and employee from day one, including specific goals, performance standards, and the support you'll provide to build a foundation of trust and accountability.
• Maintain accurate employee records for six years after employment ends, including personal details, signed contracts, tax information, and payment details to ensure legal compliance and proper pay calculations.

Budget for your first hire

Before you start looking for someone, understand the full cost of hiring an employee. It's more than just their salary. You'll also need to account for:

• National Insurance contributions
• Pension contributions
• Recruitment costs, like advertising the role
• Office space and equipment
• Training and onboarding time
• Potential bonuses and benefits

Planning for these expenses helps you set a realistic budget and ensures you can afford to bring someone on board without straining your cash flow.

Plan your recruitment approach

Recruitment time varies but typically takes four to eight weeks per hire depending on the role complexity and your approach.

Key recruitment tasks include:

• Job preparation:Writing descriptions and determining requirements
• Advertising: Posting roles online and offline
• Candidate communication: Responding to enquiries and scheduling interviews
• Selection process: Interviewing and screening applicants
• Follow-up: Communicating with unsuccessful candidates

You may not have time to do all of this. It might be more efficient to outsource some or all of these steps to someone in your team or a recruiter.

Create a clear job description

Job descriptions define the role, required skills, and salary range for your position. A clear job description attracts suitable candidates and sets proper expectations.

Create your job description with these key elements:

• Role requirements: Specific skills and experience needed
• Salary range: Clear compensation expectations
• Candidate tracking: Record strengths, weaknesses, and interview notes for each applicant
• Selection criteria: Use your records to compare and choose the best candidate

You can get started today with this free Xero job description template.

Understand your obligations as an employer

Employer obligations are the legal and tax responsibilities you have towards your employees. These vary depending on employment type and contract terms.

Your key responsibilities include:

• Tax compliance: Pay As You Earn (PAYE), National Insurance and pension contributions
• Legal requirements: Employment contracts, health and safety, and statutory rights
• Employee guidance: New staff need clear direction regardless of previous experience
• Contract-specific duties: Obligations vary by employment type (full-time, part-time, contract)

There are many different employment agreements including full-time, part-time, fixed-term, freelance, consultant and contract.

Talk to your accountant, tax agent or check the gov.uk website if you need more detail about your obligations as an employer.

Ensure each employee has a National Insurance number

National Insurance numbers are unique identifiers that every UK employee must have for tax and benefit purposes. Each employee must provide their National Insurance (NI) number to you before starting work.

Why NI numbers matter:

• Tax accuracy: Ensures tax payments are recorded correctly
• Benefit eligibility: Qualifies employees for state pension and other benefits
• Legal compliance: Required by law for all UK employees

A unique NI number is automatically assigned to all UK citizens just before they turn 16. If for any reason your new employee doesn't have one (for example, if they are a new arrival in the country) they can apply for a NI number online.

Obtain employers' liability insurance

Employers’ liability insurance is mandatory legal protection that covers compensation claims from employees injured at work. You must have this insurance from your first day as an employer.

Legal requirements of employers' liability insurance:

• Minimum cover: You must be covered for at least £5 million from an authorised insurer
• Purpose: Protects against employee injury or illness claims
• Compliance: You must display the certificate in your workplace or you could be fined £1,000
• Penalties: If you do not maintain this insurance, you commit a criminal offence and can be fined £2,500 every day you are not properly insured

You can buy employers' liability insurance from an insurer or from a specialist broker through the British Insurance Brokers' Association (BIBA) or the Association of British Insurers. The cost is based on a number of factors including:

• the nature of your business
• the number of people you employ
• your previous insurance claims history

Find out more about employers' liability insurance from the UK government's website.

Set up a payroll system

Payroll setup involves choosing how to process employee wages, taxes, and statutory payments. You have three main options, each with different time and cost implications::

• Self-managed: Handle payroll internally using software
• Accountant-managed: Outsource to your existing financial advisor
• Payroll service:Use specialist payroll providers

Software requirements: Choose systems that ensure compliance and automate HMRC reporting. Look for accounting or payroll software that:

• makes it simple to stay compliant
• can pay your employees efficiently
• files reports with HMRC

Maintain accurate tax records

Tax record keeping is a legal requirement for all employers in the UK. You must maintain accurate, secure records for six years after each employee leaves.

Essential record-keeping requirements:

• Storage duration: Six years minimum
• Security: Safe and easily accessible storage
• Automation: Use accounting software to simplify compliance

Keep track of key dates and tasks

There are so many things to remember when you are running a small business. Your new employee should make your life easier. But when they first begin, you may find your workload increases while they are coming up-to-speed with everything.

To keep on top of key dates and tasks, you can log in to HM Revenue and Customs’ (HMRC) PAYE Online service to:

• send payroll reports to HMRC
• access tax codes and notices about your employees
• appeal a penalty (if you ever get one)
• get alerts from HMRC if you are late reporting or paying, or send in the wrong monthly reports

You can register as an employer with HMRC to get email reminders, notices or alerts.

Understand the rights of your employees

All employees have rights that are legally protected. This means if their rights are not met, they can seek compensation.

There are two main types of employee rights: statutory (given by law) and contractual (given by a specific employment contract).

There are many statutory employee rights. Some of the common ones cover things like:

• Terms of employment
• Pay
• Working hours
• Discrimination
• Workplace conditions, for example health and safety

Make sure you understand all the basic rights for your employees. If you'd like to know more about your obligations when hiring employees, look at the government's A to Z for employing people.

Keep a file for each employee

Employee records are detailed files containing all employment-related information for each worker. Accurate records ensure correct pay calculations and legal compliance.

Essential record requirements:

• Personal details: Full name, address, and emergency contacts
• Employment documents: Signed contracts and tax information
• Payment details: Preferred payment methods and banking information
• Retention period: Keep records for six years after employment ends
• Access rights: Available to employees, representatives, and regulators upon request

Consider using an HR system that includes these features. These records must be kept for at least six years after the employee has left.

If you’re not sure about what information you can and should collect for each employee, contact HMRC.

Onboard your new employee effectively

Clear expectations establish what both employer and employee will deliver from the first day of employment. This creates accountability and builds strong working relationships.

Setting effective expectations:

• Employee responsibilities: Define specific goals, tasks, and performance standards
• Employer commitments: Outline support, resources, and development opportunities you'll provide
• Mutual agreement: Ensure both parties understand and accept their roles
• Foundation building: Base the relationship on trust, respect, and honest communication

A good onboarding process helps new staff feel welcome and sets them up for success. Let them know what you will provide in return.

This is a professional relationship and it should be based on mutual trust, respect and honesty. The better you treat your employees, the harder they will work for your business.

Make hiring work for your business

Successful hiring means using a clear, consistent process for every role. Putting time into hiring well helps you keep good people and improve how your business performs.

Key success factors when hiring:

• Process consistency: Apply the same rigorous approach for every hire
• Retention planning: Consider how you'll reward and retain good employees beyond salary
• Investment mindset: Quality hiring takes time and money but prevents costly mistakes
• Long-term value: Well-hired employees stay longer and contribute more to business growth

For more detail on each step, see the full Xero hiring employees guide.

Ready to streamline your business finances as you grow your team? Try Xero for free and see how Xero can help you manage payroll, track expenses and keep your financial records organised as you hire your first employees.

FAQs on hiring employees

Here are answers to some common questions about hiring employees.

What is the best way to hire employees?

The best way to hire is to follow a clear process. This includes defining the role and budget, writing a great job description, advertising in the right places, and conducting structured interviews. Being organised and transparent helps you find the right person and gives candidates a positive experience.

What is the 70% rule of hiring?

The 70% rule suggests hiring candidates who meet about 70% of the job requirements. The idea is that the remaining 30% can be learned on the job through training and mentoring. This approach can help you find great people with potential, rather than waiting for a perfect match who may not exist.

How long should a probationary period be?

In the UK, a probationary period is often three to six months. This gives you and your new employee time to see if the role is a good fit. The length should be stated clearly in the employment contract.