- Budget 15% to 20% on top of salary for employer National Insurance and minimum pension alone. A £35,000 salary costs about £40,400.
- Add recruitment, equipment and software and the first year is commonly 25% or more above salary.
- Employer NI rose to 15% in April 2025 and the threshold fell from £9,100 to £5,000, which hit part-time and lower-paid roles hardest.
- The £10,500 Employment Allowance is one pot per business, and a company whose only employee is a single director cannot claim it at all.
Take it from someone who has hired a few. The salary is the number everyone plans around, and it is about four fifths of what the person actually costs you.
Hiring someone is the point at which a lot of small businesses stop being a one-person operation and start being an employer, with all the obligations that carries. The decision is usually framed as whether you can afford the salary. That is the wrong number.
This guide covers what an employee actually costs, how that compares with a contractor, and the legal steps you have to complete before someone starts. The true cost of hiring calculator will run the figures on a specific salary.
What an employee really costs
Take a £35,000 salary. Here is what the business actually pays, at 2025/26 rates, assuming the Employment Allowance has already been used elsewhere:
| Cost | Amount | How it is worked out |
|---|---|---|
| Gross salary | £35,000 | The headline figure |
| Employer National Insurance | £4,500 | 15% of earnings above £5,000 |
| Employer pension | £863 | 3% of qualifying earnings, £6,240 to £50,270 |
| Unavoidable total | £40,363 | 15.3% above salary |
| Software and tools | £600 | Typical per-head licences |
| Recruitment | £2,000 | One-off, advertising or agency |
| Equipment and setup | £1,500 | One-off |
| First year total | £44,463 | 27% above salary |
You pay for holiday but get no output during it. On 28 days leave and a 37.5 hour week, that £40,363 buys 232 working days, or about £23.20 for every hour actually worked. Salary divided by contracted hours would have told you £17.95, which is a third too low.
The change that caught small employers out
Two things moved at once in April 2025, and the second matters more than the first.
The threshold cut is the sharper change. Dropping the point at which employer NI starts from £9,100 to £5,000 brings an extra £4,100 of every employee's pay into charge, which costs £615 per head before the rate rise is even considered. Proportionally it hits part-time and lower-paid roles hardest, because that £4,100 is a much larger share of their total pay.
The Employment Allowance more than doubling offsets this completely for many small employers. For some it does not, and the reason is worth understanding properly.
The Employment Allowance trap
The Employment Allowance reduces your annual employer National Insurance bill by up to £10,500. Two things about it catch people out.
It is one pot for the whole business, not one per employee. If you have four employees and your total employer NI bill is £18,000, the allowance covers £10,500 of it and you pay the remaining £7,500. Every hire after the allowance is exhausted carries its NI in full. That is why the calculator defaults to assuming the allowance is already spent: for most second and subsequent hires, it is.
Single-director companies cannot claim it at all. If the only employee paid above the secondary threshold is also a director, you are excluded. This catches a very large number of one-person limited companies, who often assume the allowance wipes out their employer NI and find it does not.
If your company currently has one director and no other staff, taking on an employee paid above the secondary threshold generally makes the company eligible. The allowance can then offset employer NI on both of you, which softens the cost of the hire considerably.
Employee or contractor?
For irregular or short-term work, a contractor is often cheaper despite a higher headline rate, because none of the ongoing employer obligations attach. For steady, ongoing work under your direction, an employee is usually both cheaper and legally correct.
You pay: salary, employer NI at 15%, pension, holiday, sick pay, and notice on termination.
You get: someone who works when and how you direct, whose output belongs to the business, who builds knowledge over time and who can be given any task within their role.
You commit to: PAYE and RTI submissions, pension auto-enrolment, statutory rights that accrue with service, and a process if it does not work out.
You pay: an invoice. No employer NI, no pension, no holiday, no notice period.
You get: a specific piece of work, usually delivered on their own terms and schedule, with their own equipment.
You commit to: much less, but you also direct much less. A genuine contractor decides how the work gets done. If you are controlling the how, you may have an employee regardless of the paperwork.
Status is decided by the reality of the arrangement, not by what the contract calls it. The questions that matter most are:
- Control. Do you decide what, how, when and where? That points to employment.
- Substitution. Could they send a competent replacement in their place? A genuine right of substitution points away from employment.
- Mutuality of obligation. Are you obliged to offer work and are they obliged to accept it?
Getting this wrong is expensive. HMRC can reclassify the arrangement and pursue the unpaid tax and National Insurance from you, with interest and penalties.
What you must do before they start
None of this is difficult, but several items have legal deadlines and the penalties are automatic.
Before your first employee starts
0 of 10With very limited exceptions, you must hold at least £5 million of cover from the day your first employee starts. The fine for not having it can reach £2,500 for every day you are uninsured, which makes it the single most expensive thing on the list to forget.
Pension auto-enrolment, briefly
Auto-enrolment applies from the day you employ someone. You must assess each member of staff and put eligible ones into a qualifying pension scheme automatically.
An employee must be enrolled if they are aged 22 or over, under State Pension age, earn more than £10,000 a year and work mainly in the UK. Staff outside those criteria may still have a right to join, and you have to tell them so.
The minimum total contribution is 8% of qualifying earnings, of which at least 3% must come from you. Qualifying earnings are the slice between £6,240 and £50,270, which is why the pension cost on a £35,000 salary is £863 rather than £1,050.
How to know you are actually ready
The cost is only half the question. The other half is whether the work genuinely exists and whether you can afford the commitment when a quiet quarter arrives.
- Is the work permanent? A busy three months is not a job. Employment is a fixed cost that continues through the quiet months.
- Can you cover twelve months from reserves if revenue dips? Redundancy is expensive, slow and demoralising for everyone involved.
- Is there enough for a whole role? Several half-jobs stitched together tends to produce a frustrated employee and a confused manager.
- Can you afford the management time? First hires need considerably more of your attention than experienced staff, and that time comes out of billable work.
- Have you compared the alternatives? A contractor, an agency, or automating part of the work may be a better fit for the same money. The guide on where AI earns its place covers the last of those honestly.
