Cost of employing someone

What an employee costs beyond their salary — employer National Insurance and the minimum pension contribution, using the current rates.

The number that surprises people is Employment Allowance. It cuts the employer National Insurance bill by a fixed amount per business each year, which for a small employer can wipe it out entirely.

What the employee is paid, before deductions.

3% is the auto-enrolment minimum. Many employers pay more.

The short version

Employer NI
15% on pay above the secondary threshold of £5,000 a year.
Employment Allowance
Up to £10,500 off the employer NI bill, per business per year — not per employee.
Minimum pension
3% employer contribution on qualifying earnings, with the employee putting in 5%.
Rough rule
Budget 15 to 20 per cent above salary for payroll costs, before equipment and overheads.
Not included here
Recruitment, equipment, insurance, training and workspace. Often another 15 to 30 per cent.

Common questions

How much does an employee really cost?

Payroll cost is typically 15 to 20 per cent above salary once employer National Insurance and the minimum pension contribution are counted. Equipment, software, insurance and workspace sit on top of that, and for an office-based role they often add another 15 to 30 per cent again.

What is Employment Allowance and do I qualify?

It reduces your employer National Insurance bill by up to a set amount each year. Most employers qualify; a limited company whose only employee is a single director does not. It is claimed through payroll and applies per business, so it does not scale with headcount.

Why is employer National Insurance due on such low pay?

Because the secondary threshold is far below the employee one. Employer National Insurance starts at £5,000 a year while the employee pays nothing until £12,570, so there is a band where the employer contributes and the worker does not.

Do I have to pay into a pension for every employee?

You must enrol anyone aged 22 to State Pension age earning above the auto-enrolment trigger, and contribute at least 3% of their qualifying earnings. Staff below the trigger can ask to join, and you must still contribute if they earn above the lower limit.

Does salary sacrifice reduce what I pay?

Yes. Sacrificed pay is not subject to employer National Insurance, so an employee moving pension contributions into salary sacrifice reduces your bill as well as theirs. It is one of the few arrangements that genuinely benefits both sides.

Is this the same as the cost of a contractor?

No. A contractor day rate carries no employer National Insurance, no pension and no paid leave, but it also carries no notice period and no employment rights. Compare the annual totals rather than the headline rates, and check whether IR35 applies.

What the terms mean

Secondary threshold
The point where employer National Insurance starts. It is much lower than the employee threshold, so employer NI is due on pay well below the personal allowance.
Employment Allowance
A reduction in an employer's National Insurance bill, claimed through payroll. Per business per year, and not available to a company whose only employee is a sole director.
Qualifying earnings
The band of pay auto-enrolment contributions are calculated on, running from a lower to an upper limit rather than from the first pound.
Auto-enrolment
The duty to enrol eligible staff into a workplace pension and contribute. The employer minimum is 3% of qualifying earnings.
Class 1 secondary
The formal name for employer National Insurance. Class 1 primary is the employee's share.

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Figures on this page are checked against primary sources and dated. They are not legal, tax or financial advice.

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