Salary is the headline. Employer National Insurance, pension, recruitment and equipment turn it into a much bigger number.
Budget roughly 15% to 20% on top of salary for the unavoidable employment costs, and more once you add the extras. A £35,000 salary costs about £40,400 a year in employer National Insurance at 15% and the minimum 3% pension contribution alone, before recruitment, equipment, software or training. Include those and the first year lands nearer £44,000.
The rise that caught most small businesses out was in April 2025: employer National Insurance went from 13.8% to 15%, and the threshold at which you start paying it dropped from £9,100 to £5,000. That change alone added several hundred pounds a year to the cost of every employee, and disproportionately hit part-time and lower-paid roles.
Ongoing costs plus first-year one-offs.
Here is exactly what the tool does with your numbers.
| Component | How it is calculated |
|---|---|
| Employer NI | 15% of salary above £5,000, less the £10,500 Employment Allowance where eligible |
| Pension | Your % of qualifying earnings between £6,240 and £50,270 |
| Days worked | 260 working days less paid holiday |
| Cost per hour | Ongoing annual cost ÷ (days worked × hours per day) |
The cost-per-hour figure is the one worth remembering. Because you pay for holiday but get no output during it, the real cost of an hour of work is always higher than salary divided by contracted hours.
Not included: employer’s liability insurance, office space, management time, training, sick pay, maternity or paternity cover, and the Apprenticeship Levy (which only applies to payrolls above £3m).
Around 15% to 20% more than the salary for the unavoidable costs. Employer National Insurance at 15% on earnings above £5,000 is the largest single addition, followed by the minimum 3% pension contribution on qualifying earnings. A £35,000 salary therefore costs roughly £40,400 a year.
Software, equipment, recruitment and training push the first year higher again, commonly to 25% or more above salary.
The Employment Allowance lets eligible employers reduce their annual employer National Insurance bill by up to £10,500. Most businesses and charities with employees can claim it, and since April 2025 the previous £100,000 eligibility cap has been removed.
The main exclusion catches small companies: if the only employee paid above the secondary threshold is also a director, you cannot claim. Taking on a second employee usually resolves this.
Two things changed at once. The employer rate rose from 13.8% to 15%, and the secondary threshold, the point at which employer NI starts, fell from £9,100 to £5,000. The threshold cut has the bigger effect on lower salaries because it brings a much larger slice of pay into charge.
The Employment Allowance rose from £5,000 to £10,500 at the same time, which offsets the increase entirely for many small employers, but not for single-director companies who cannot claim it.
Compare the true annual cost here against a contractor day rate multiplied by the days you would actually need. Contractors cost more per day but carry no employer NI, pension, holiday or notice period, so they win for irregular or short-term work.
Be careful that the arrangement genuinely is contracting. If someone works set hours under your direction like an employee, HMRC can treat them as one regardless of the paperwork.
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