Setting Up HR From Scratch: A UK Small Business Guide

Setting up HR from scratch is less complicated than it sounds if you work through the requirements in the right order. Most founders overcomplicate this by trying to do everything at once. The reality is that a handful of legal requirements come first, and everything else can be added as you grow.

The Priority Order

Work through these in sequence. Do not start on step 3 until step 1 is complete.

Step 1: HMRC Employer Registration

Before your first payroll run, you must register as an employer with HMRC. This gives you an employer PAYE reference number, which you need to submit Real Time Information (RTI) payroll data.

How: Register online at GOV.UK. You can register up to 2 months before you first pay an employee.

Payroll software: Choose your payroll tool before your first payroll run. Options:

• HMRC Basic PAYE Tools: free, works for up to 9 employees, limited features
• Xero, QuickBooks, or FreeAgent: typically £5-15/month extra for payroll, integrates with your accounts
• Dedicated payroll software (e.g. Sage Payroll, BrightPay): from £10-30/month for small teams

Your payroll software must be able to submit RTI data to HMRC on or before every payday. This is a legal requirement.

Step 2: Employment Contracts

Every employee must have a written statement of employment particulars from day one of employment. This is not optional.

The statement must include: names of employer and employee, job title and description, start date, pay and pay frequency, working hours, holiday entitlement, notice periods, and sick pay entitlement (at minimum Statutory Sick Pay).

Sources for contracts:

• ACAS provides free guidance on what to include
• GOV.UK has basic template information
• A solicitor-drafted template: £200-500 one-off, worth it for your standard employment contract
• Employment law firm fixed-fee services: some offer contract drafting from £150

Get contracts signed before or on the first day of employment. Digital signatures are legally valid in the UK.

Step 3: Right to Work Checks

You must check every employee's right to work in the UK before employment starts. The check must be documented.

What to check: For most employees, a UK or Irish passport, or a Biometric Residence Permit, is sufficient. GOV.UK has a comprehensive list of acceptable documents.

What to keep: A copy of the document, dated and signed by you as confirmation of the check.

For non-UK/Irish nationals: Use the Home Office online right to work checking service where applicable. Some workers will have a share code from the Home Office online service instead of a physical document.

Do not wait until after someone starts to do this check. Employing someone without the right to work in the UK carries a civil penalty of up to £20,000 per worker.

Step 4: Auto-Enrolment Pension

Auto-enrolment is the legal requirement to enrol eligible workers in a workplace pension and contribute a minimum of 3% employer contribution (the worker contributes at least 5%).

Eligible workers: Aged 22-66, earning over £10,000 per year, working in the UK.

What you need: A qualifying pension scheme. If you do not have one, Nest (the government-backed scheme) is free to set up and accepts all employers.

Your duties: Assess all workers, enrol eligible workers within 6 weeks of their first day, write to workers within 6 weeks explaining the scheme, keep records of contributions, re-enrol leavers every 3 years.

The Pensions Regulator's website has a step-by-step guide. Do not ignore auto-enrolment - penalties start at £50 per day and escalate.

Step 5: Core Policies

Legally required (if 5+ employees): Written health and safety policy.

Required in practice: Disciplinary and grievance procedure. Without a written procedure, you cannot demonstrate that a fair process was followed - which is essential if you ever need to dismiss someone.

Required by GDPR: An employee privacy notice explaining what personal data you hold, why, and how long you keep it.

Strongly recommended: Sickness absence policy, equal opportunities statement, data protection policy.

ACAS provides free template policies for disciplinary, grievance, and sickness absence procedures. These are adequate for most small businesses.

What to Build Later

Once the legal foundations are in place, add these as your headcount grows:

• Performance review process (from around 10 employees)
• Onboarding documentation and checklists (from 5-10 employees)
• Absence management reporting (when absence patterns become relevant)
• Recruitment process documentation (when you are hiring regularly)
• Employee handbook (when you have enough policies to compile)

What to DIY vs What to Outsource

Task	DIY or Outsource?	Notes
Payroll	DIY with software	Straightforward with the right tool
Employment contracts	Outsource once	Get a solicitor to draft your standard template
Right to work checks	DIY	Follow GOV.UK guidance precisely
Auto-enrolment setup	DIY	Use Nest; follow The Pensions Regulator guide
Health and safety policy	DIY	ACAS template is adequate for most offices
Disciplinary/grievance procedure	DIY initially	ACAS template, adapted for your business
Conducting a disciplinary hearing	Outsource complex cases	Get HR advice for anything that might lead to dismissal
Dismissals	Always get advice	Employment solicitor or outsourced HR
Redundancy	Always get advice	Process failures are expensive

The pattern is: set up the standard processes yourself using GOV.UK and ACAS guidance, and bring in professional support whenever a case involves potential dismissal, legal risk, or significant conflict.

Common Mistakes to Avoid

Not having contracts signed before day one: Verbal contracts exist in law, but proving their terms is extremely difficult. Always have written contracts signed before or on the first day.

Treating the probation period as fire-and-forget: Employees have full unfair dismissal rights from day one for certain protected reasons (discrimination, whistleblowing). Even during probation, dismissal must be non-discriminatory and handled with basic fairness.

Ignoring auto-enrolment deadlines: The Pensions Regulator monitors compliance. Missed deadlines result in fixed and escalating penalties.

Keeping poor records: In any employment dispute, the quality of your documentation determines your position. Keep records of every significant decision, conversation, and process.

Buying HR software before the basics are in place: Software does not replace legal compliance. Get contracts, right to work, and auto-enrolment sorted first, then invest in tools.

This is guidance, not legal advice. ACAS (acas.org.uk) provides free guidance for employers and is an excellent resource for small business HR. For specific employment law questions, consult an employment solicitor.