Do sole traders need to register for PAYE if they hire someone?

Understanding PAYE and what it means for sole traders

Hiring your first worker is a big step as a sole trader. It often signals that your business is growing, your workload is increasing, or you want to improve customer service by bringing in extra hands. Alongside that growth comes a set of legal and administrative responsibilities, and one of the most important in the UK is understanding PAYE.

PAYE stands for “Pay As You Earn.” It is the system HM Revenue & Customs (HMRC) uses to collect Income Tax and National Insurance contributions (NICs) from employment income. If you pay someone as an employee, you normally have to operate PAYE, which means you calculate and deduct tax and NICs from their wages, pay employer NICs where applicable, report payroll information to HMRC, and pay the amounts due over to HMRC on time.

The short answer to the question “Do sole traders need to register for PAYE if they hire someone?” is: often, yes. But not always. Whether you must register depends on who you are hiring, how you are paying them, whether they are actually an employee or a self-employed contractor, and whether the pay level crosses certain thresholds that trigger payroll reporting and deductions.

This article walks through the key rules and practical scenarios so you can decide whether you need to register for PAYE, what to do if you do, and what pitfalls to avoid when taking on staff as a sole trader.

Sole trader employer: what changes when you hire someone?

As a sole trader, you and the business are not separate legal entities. That doesn’t stop you from being an employer. The moment you hire someone under an employment arrangement, you take on employer duties. These include paying at least the National Minimum Wage (where it applies), providing statutory rights like paid holiday, managing workplace safety, and handling payroll and reporting correctly.

PAYE sits at the centre of those payroll obligations. It is the mechanism that ensures the employee’s tax and NICs are accounted for throughout the year rather than paid in a single lump sum later. For many new employers, PAYE is also the first time they deal with regular reporting to HMRC.

It’s worth stressing that “hiring someone” can mean different things. You might take on a full-time employee, a part-time assistant, an apprentice, a casual worker for busy periods, or a freelancer. PAYE requirements are most closely tied to employing someone, but in some cases they can also apply to contractors depending on the nature of the work and the contractual relationship.

PAYE registration: the basic rule

In general, if you pay someone as an employee, you must register as an employer and set up PAYE so you can run payroll and report payments to HMRC. This applies whether your business is a sole trader, partnership, or limited company. The key point is not the business structure, but whether you are making payments that count as employment income.

However, HMRC does not require every business that pays a person to register for PAYE immediately. There are specific circumstances where you can pay an employee without operating PAYE, especially if they earn below certain thresholds and have no other employment. In practice, though, many employers still choose to run PAYE because it simplifies compliance and creates a clear record of pay and deductions.

Think of PAYE registration as the “gateway” to payroll reporting. Once you are registered and set up, you can legally operate payroll, issue payslips, send Real Time Information (RTI) submissions to HMRC, and pay the correct liabilities. If you should have registered and didn’t, you can end up with missed filings, late payment penalties, and complicated corrections.

Employee or self-employed contractor: the decision that drives PAYE

Before you decide whether you need to register for PAYE, you must figure out whether the person you’re hiring is actually your employee. This is one of the most common areas of confusion for sole traders, especially when hiring freelancers or casual workers.

An employee typically works under a contract of employment. They may have set hours, an ongoing obligation to do work, and they are often under your control or direction regarding how, when, and where tasks are done. They are usually integrated into your business: for example, they might wear your uniform, use your systems, and represent your business to customers. Employees generally have statutory rights such as holiday pay and sick pay (subject to eligibility).

A genuinely self-employed contractor usually runs their own business. They may work for multiple clients, set their own hours, decide how to do the work, provide their own equipment, and bear financial risk. They invoice for their work and handle their own tax and National Insurance through Self Assessment. In a true contractor relationship, you pay the invoice gross and do not deduct PAYE tax or employee NICs.

It’s not enough to label someone as “self-employed” in a contract if the reality looks like employment. HMRC considers the actual working relationship. Misclassifying workers can lead to arrears of PAYE and NICs, plus interest and penalties, which can be very painful for a growing sole trader business.

If you are hiring someone and you’re not sure whether they are an employee or self-employed, it’s sensible to review the situation carefully before the first payment. The nature of the work, control, substitution rights, and the overall “feel” of the relationship matter. If the person will be treated like a staff member, PAYE is likely to be required.

When do you legally need to register for PAYE?

Many sole traders hear “If you hire someone, you must set up PAYE.” That is a good rule of thumb, but the true answer depends on pay levels and the worker’s circumstances.

You generally need to register for PAYE if any of the following apply to the person you are paying as an employee:

1) They are paid at or above the Lower Earnings Limit (LEL) for National Insurance. Even if no tax is due, pay at or above this level usually means the earnings must be recorded for NIC purposes and reported through payroll.

2) They have another job or receive a pension. In these cases, even low earnings from your business can require PAYE operation because their tax position is affected by other income sources, and HMRC often expects payroll reporting.

3) You provide them with expenses or benefits. Some benefits are taxable and require reporting and, in some cases, payroll processing or separate reporting.

4) You want to claim Employment Allowance or you have other employer liabilities such as employer NICs. To handle these properly, you typically need a PAYE scheme.

5) You pay them a salary regularly and treat them like an employee (for example, you provide payslips and follow an employment contract). This is not a threshold-based rule as such, but it’s a strong indicator that you should be operating PAYE.

For many sole traders, the first trigger they run into is the Lower Earnings Limit. If you are paying someone at or above that level, you’ll normally be expected to have them on payroll and to submit payroll information to HMRC.

Even if pay is below the LEL, there are still situations where PAYE is required. The presence of another job or pension is a classic example. Another trigger is if the employee has a student loan or if they are taxed at a different code because HMRC needs payroll reporting to collect the right amounts. These details are typically managed through PAYE once the person is on payroll.

When you might not need to register for PAYE

There are situations where a sole trader can pay an employee without operating PAYE. The most common is where the employee is paid below key thresholds and has no other job or pension. In this narrow scenario, there may be no PAYE tax to deduct and no NICs due, and HMRC may not require a PAYE scheme purely for that employee.

That said, “may not need to” is not the same as “should not.” Many employers choose to set up PAYE anyway because:

- It creates a clean, compliant payroll record.

- It provides the employee with payslips and proper documentation.

- It reduces the risk of missing a trigger later (for example, overtime or a pay rise that pushes earnings above the LEL).

- It avoids confusion if the employee later takes a second job or starts receiving a pension.

Also, if you pay anyone who is an employee and the circumstances change mid-year, you could suddenly be required to operate PAYE. Setting it up from the start can be simpler than scrambling to fix things later.

In practical terms, if you are hiring someone to work regularly in your business, and you anticipate that their pay could increase, or that they might have other income, registering for PAYE early is often the safer and more organised approach.

What about paying family members or your spouse?

Sole traders often hire family members, especially spouses or older children, to help with admin, packing orders, bookkeeping, social media, or customer service. The PAYE rules do not disappear just because the worker is related to you. If they are an employee, you need to treat them like any other employee for payroll purposes.

There are a few additional considerations when employing family members:

- The wage must be “wholly and exclusively” for business purposes to be an allowable business expense. In other words, you need to be able to justify that the work is real and the pay is reasonable for the tasks performed.

- The arrangement should be documented like a normal employment relationship: job description, agreed hours, and a clear record of payments.

- If the pay crosses PAYE/NIC thresholds, you will need to operate PAYE just as you would for an unrelated employee.

Even if pay is modest and potentially below thresholds, it can still be sensible to run payroll. It demonstrates the payments are genuine wages for actual work rather than informal transfers.

Casual staff, part-time help, and zero-hours arrangements

Not every hire is a full-time employee. Many sole traders bring in casual staff during peak seasons, such as retail busy periods, event support, hospitality shifts, or temporary admin help. If those workers are employees, PAYE can apply even if they work irregular hours.

The key factors are still employment status and pay level. If your casual worker earns above the reporting thresholds, or has other employment/pension income, you’re likely to need a PAYE scheme. Even if they do not, operating PAYE can still be the simplest approach, particularly if you have multiple casual workers across a year.

Payroll software can handle irregular pay, weekly or monthly schedules, and fluctuating hours. The administrative load is often less than people fear, especially if you set it up properly from the start.

Hiring freelancers and subcontractors: do you need PAYE then?

If you hire a freelancer who is genuinely self-employed, you usually do not register for PAYE solely because of that engagement. You pay their invoice and they handle their own tax. But you should be careful here, because some arrangements that look like contracting can be viewed as employment, particularly if the worker is effectively part of your day-to-day business.

There are also scenarios in certain industries where additional rules apply to payments to subcontractors, such as construction, where a separate tax deduction framework can exist. If you work in an industry with special subcontractor rules, it’s worth checking the specific obligations that apply to you before assuming that “freelancer means no PAYE.”

For most typical small-business scenarios—hiring a freelance designer, a copywriter, a photographer, a web developer, or a consultant—the key is ensuring the person is truly operating independently, invoices you, and controls how the work is delivered. Maintain a paper trail: contracts, invoices, and evidence they have other clients or a business identity. This helps you support the classification if HMRC ever asks.

PAYE registration in practice: what it involves

If you decide you need to register for PAYE, or you choose to do it proactively, what does it actually involve?

Registering as an employer means setting up an employer PAYE scheme with HMRC. Once you are registered, you can run payroll using payroll software. Payroll software calculates employee tax, employee NICs, and employer NICs where applicable. It also helps you produce payslips and required reports.

In the UK, payroll is reported through Real Time Information (RTI). This means that each time you pay an employee, you submit information to HMRC on or before the pay date. The main submission is the Full Payment Submission (FPS), which tells HMRC how much you paid and what deductions you made.

At the end of each tax year, there are year-end processes, including giving employees a P60 (if they were employed on the last day of the tax year). If someone leaves, you provide a P45. Payroll software usually produces these automatically.

You’ll also need to pay HMRC the tax and NICs you have deducted (plus employer NICs) by the relevant deadlines, usually monthly unless you qualify for quarterly payments. Again, payroll software and a good bookkeeping routine can make this manageable.

What if you only hire one person?

Even if you hire a single part-time assistant, the same PAYE principles apply. Many sole traders assume PAYE is “for bigger businesses” with multiple staff. It isn’t. If the person is your employee and the triggers apply, you are an employer and you must handle payroll correctly.

The good news is that modern payroll systems are designed to accommodate small employers. You don’t need a dedicated payroll department. Many sole traders run payroll themselves using software, or they ask their accountant or bookkeeper to handle it for a monthly fee. The key is not the scale, but the accuracy and timeliness of reporting.

How thresholds and tax codes affect the decision

Payroll obligations can feel confusing because they mix tax rules, National Insurance categories, and a worker’s personal circumstances. A worker’s tax code influences how much tax to deduct, but it does not necessarily determine whether PAYE is required. The requirement to operate PAYE is more closely linked to whether the worker is an employee and whether their earnings and circumstances trigger reporting and deductions.

If an employee’s pay is above the LEL, they are generally building up National Insurance credits, which is why reporting becomes important even when no NIC is actually deducted at the lowest levels. If pay rises into higher bands, employee NICs and employer NICs can become due. If pay rises further, Income Tax may also be deducted depending on the tax code and cumulative earnings.

Another subtle point is that the employee might ask you to put them on payroll even if their earnings are low, because having formal payslips and official records can help them with benefits applications, renting accommodation, or proving income. While not a legal requirement by itself, it can be a practical reason to set up PAYE.

What happens if you should have registered but didn’t?

Failing to register for PAYE when required can create a chain of problems. The first is that HMRC expects RTI submissions for employees who meet the reporting triggers. If you never registered, those submissions never happened. HMRC may later discover the employment through other data, such as the employee’s tax records, a claim for benefits, or a compliance check.

When HMRC identifies that PAYE should have been operated, they can require you to correct the situation. This may involve:

- Registering for PAYE late and backdating payroll records.

- Calculating tax and NICs that should have been deducted.

- Paying employer NICs that should have been paid.

- Potential penalties for late filing and late payment.

- Interest on amounts due.

It can also create employee relations issues. If tax and NICs should have been deducted but weren’t, there can be disputes over whether you can recover employee contributions from wages later. The simplest approach is to get it right from the start, or to correct it promptly as soon as you realise there is an issue.

What about paying someone “cash in hand”?

Some sole traders mistakenly think paying someone in cash avoids payroll obligations. It doesn’t. Cash payments can still be taxable employment income. If the worker is an employee and the PAYE triggers apply, you are still responsible for operating PAYE, issuing payslips, and reporting. Paying in cash merely changes the method of payment, not the tax treatment.

Additionally, cash-in-hand arrangements without proper payroll can raise suspicion and increase the risk of compliance action. Keeping accurate records and running payroll protects you and supports the legitimacy of your business.

Other employer duties that often come with PAYE

When you register for PAYE and start paying employees, you will often encounter other related duties. Some are legally required; others depend on circumstances.

Payslips: Employees are generally entitled to an itemised payslip showing gross pay, deductions, and net pay. Payroll software generates this.

Workplace pension: Many employers have duties around workplace pensions and automatic enrolment. Whether you must automatically enrol an employee depends on age and earnings, but you typically have obligations to assess workers and provide information even if no one is enrolled.

Statutory payments: Depending on eligibility, you might need to handle Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), and other statutory family-related payments. These are normally administered through payroll.

Employer’s Liability Insurance: If you employ staff, you may need Employer’s Liability insurance, with some limited exceptions in certain family employment situations. It is often a legal requirement and a practical safeguard.

Right to work checks: Employers must carry out right to work checks to ensure the person is legally allowed to work in the UK. This is separate from PAYE but often arises at the same time.

While these topics extend beyond the PAYE registration question, they matter because new employers often discover them only after they have already hired. Treat “do I need PAYE?” as part of a broader “am I set up correctly as an employer?” checklist.

A step-by-step way to decide if you need PAYE

If you want a practical decision process, use the following steps:

Step 1: Identify the worker’s status. Are they an employee (or likely to be treated as one) or a genuinely self-employed contractor? If they are an employee, continue.

Step 2: Look at expected pay levels. Estimate their weekly or monthly pay. Will it be at or above the Lower Earnings Limit for National Insurance? If yes, PAYE is likely required.

Step 3: Ask about other income sources. Do they have another job or receive a pension? If yes, PAYE is more likely to apply even at low pay.

Step 4: Consider benefits and expenses. Will you provide anything beyond basic wages that could be taxable? If yes, you may need payroll reporting.

Step 5: Decide whether to register proactively. Even if you might not be strictly required at the lowest pay levels, registering early can prevent future issues, especially if pay may increase or working patterns change.

Step 6: Set up payroll processes. Choose payroll software or a payroll provider, set pay schedules, collect starter information (such as starter checklists or previous employment details), and establish a calendar for RTI submissions and HMRC payments.

This process won’t cover every edge case, but it will handle most real-world situations a sole trader faces when taking on a first hire.

Common scenarios for sole traders

Let’s bring this to life with typical scenarios sole traders encounter. These examples show why the answer is often “yes,” but not universally.

Scenario 1: You hire a part-time admin assistant for 10 hours a week

If the admin assistant is your employee and the pay is at or above the relevant earnings thresholds, you’ll need to register for PAYE and run payroll. Even if their pay is low, if they have another job, PAYE may still be required. This is a classic case where setting up PAYE early is usually the right move.

Scenario 2: You hire a freelancer to redesign your website

If the freelancer is self-employed, invoices you, works independently, and controls how the work is done, you normally do not need PAYE for this relationship. The key is making sure it is not disguised employment. Keep invoices and a contract that reflects genuine independence.

Scenario 3: You hire a casual worker during peak season

If they are an employee, PAYE requirements depend on pay and circumstances. Many casual workers have other jobs, which can push you toward needing PAYE even if your wages are modest. If you regularly hire seasonal staff, setting up PAYE is often unavoidable and can save you headaches.

Scenario 4: You pay your spouse for bookkeeping

If your spouse is genuinely working for the business and you pay them wages, then PAYE rules apply as they would for anyone else. Document the role and pay appropriately. If earnings cross thresholds, you should register for PAYE.

Scenario 5: You hire an apprentice or young worker

Apprentices and younger workers may still be employees, and PAYE can apply. The fact that someone is young or in training does not remove the payroll requirement. Pay and status determine the outcome.

Choosing payroll software vs using an accountant

Once you decide to register for PAYE, the next practical question is how to run payroll. Many sole traders use payroll software because it automates calculations and submissions. Others outsource payroll to an accountant or bookkeeper, especially if they prefer to focus on sales and delivery rather than admin.

If you are comfortable with routine admin tasks, payroll software can be straightforward. You enter the employee’s details, tax code information, hours or salary, and the software produces payslips and submits RTI reports. You still need to ensure the inputs are correct and that submissions happen on time.

If you are short on time, anxious about compliance, or hiring multiple staff, outsourcing payroll can reduce stress. The provider will still need accurate information from you (hours, bonuses, start and leave dates), and you remain responsible for paying employees correctly and on time. Outsourcing does not remove employer responsibility, but it can reduce errors.

Record-keeping: what you should keep from day one

Whether or not PAYE is required, record-keeping matters. If you run PAYE, keep payroll reports, payslips, RTI submission confirmations, and HMRC payment records. If you are paying someone as a contractor, keep the contract, invoices, and evidence of payment.

Good record-keeping helps you:

- Demonstrate compliance if HMRC asks questions.

- Track employment costs accurately for budgeting and pricing.

- Support expense claims in your business accounts.

- Resolve disputes quickly if an employee queries their pay.

From a business perspective, payroll is not only a compliance task; it is also a management tool. Knowing your true staff costs (including employer NICs and pension contributions where relevant) helps you set prices and plan growth.

What if you hire someone abroad or they work remotely?

Remote working can complicate payroll. If the person is working in the UK and is your employee, PAYE is typically relevant. If they are based abroad, you may have payroll and tax obligations in another country, and UK PAYE may not apply in the same way. The correct treatment depends on residency, where the work is performed, and the legal employment relationship.

If you are a sole trader hiring someone who will work outside the UK, it is wise to seek professional advice before paying them as an employee. Cross-border employment can create obligations that are easy to overlook, and mistakes can be costly.

Practical tips to stay compliant and keep payroll simple

If you’re a sole trader hiring your first employee, here are practical ways to make PAYE less intimidating:

Register early if you’re close to thresholds. If you think the worker’s earnings may rise or fluctuate, setting up PAYE from the start avoids sudden compliance gaps.

Collect starter details promptly. Ensure you have the necessary information to apply the correct tax code and to run payroll accurately.

Choose a consistent pay schedule. Weekly or monthly is fine, but consistency helps you build a routine and avoid missed submissions.

Set reminders for RTI and HMRC payments. Late submissions and payments can trigger penalties. A simple calendar system can prevent issues.

Budget for employer costs. Your staff cost is not just wages; employer NICs and pension duties can add to the headline number.

Document employment arrangements. Even for part-time or casual roles, a written agreement clarifies expectations and supports correct payroll treatment.

So, do sole traders need to register for PAYE if they hire someone?

In many cases, yes. If you hire someone as an employee and their pay and circumstances trigger payroll reporting and deductions, you will need to register as an employer and operate PAYE. The key determinants are employment status, earnings levels relative to National Insurance thresholds, and whether the worker has other income such as another job or a pension.

There are limited situations where you might not be required to register immediately—most commonly where an employee is paid below certain thresholds and has no other job or pension. But even then, registering and running payroll can still be the most practical and future-proof option, especially if the employment is ongoing or pay may change.

The safest approach for a growing sole trader business is to treat payroll as part of your professional foundation. If you are employing someone in a real sense—directing their work, paying them regularly, and integrating them into your operations—PAYE is likely part of the deal. Getting it set up early helps you pay people correctly, keep clean records, and avoid stressful corrections later.

If you’re uncertain, focus on the two biggest questions: “Is this person truly my employee?” and “Do their earnings or circumstances trigger payroll reporting?” Answer those accurately, and the PAYE registration decision becomes much clearer.