The true cost of an employee in the UK: can your business afford to hire?

Suppose you’re about to offer someone a salary of £35,000. It’s tempting to put £35,000 into your budget and move on.

Unfortunately, the payroll team won’t be so easily persuaded.

The true cost of an employee in the UK also includes employer’s National Insurance, pension contributions and the expense of recruiting, equipping and training them. There may then be a gap between the employee starting work and producing enough value to justify the cost.

The right person can increase capacity, improve service and give you back time to run the business. But you need to test the decision against the full figure, not just the salary in the job advert.

Start with the statutory employment costs

For the 2026/27 tax year, most employers pay National Insurance at 15% on an employee’s earnings above the £5,000 annual Secondary Threshold. You can find the current figures in HMRC’s rates and thresholds for employers.

Different rules may apply to certain employees, including eligible apprentices, veterans and people under 21. Your business may also qualify for the Employment Allowance, which can reduce an eligible employer’s annual National Insurance liability by up to £10,500.

Be careful when including that allowance in your recruitment calculation. If your existing payroll already uses it in full, the new employee could still create the full additional National Insurance cost.

You’ll normally need to make workplace pension contributions too. Under the current workplace pension rules, the minimum employer contribution is usually 3% of qualifying earnings. For most schemes, those earnings fall between £6,240 and £50,270.

Your contribution may be higher if you offer more generous terms or use a different definition of pensionable pay.

Paid leave affects capacity

Almost all workers are entitled to 5.6 weeks’ paid holiday each year, based on their normal working week. For someone who works five days a week, that usually means 28 days. Bank holidays can be included within this entitlement.

You shouldn’t add another 28 days of salary to your calculation because the annual salary already includes holiday pay. The cost appears in the work that still needs doing while the employee is away.

Colleagues may need to provide cover. You might have to pay overtime or bring in temporary help. This matters particularly when one person performs a specialist role that nobody else can easily cover.

Sickness and other absences can affect capacity too. Your budget needs to reflect the fact that no employee will produce the same number of useful hours every week of the year.

The first year is usually the most expensive

Recruitment may involve advertising costs, agency fees and time spent reviewing applications and holding interviews. Once the employee starts, they may need a laptop, software licences, training or a suitable workspace.

There’s also a cost attached to the time other employees spend helping them settle in. Even an experienced recruit needs to understand your systems, customers and expectations before they can work at full speed.

These costs vary too much for a standard percentage to be helpful. Recruiting a junior administrator directly isn’t the same as using a specialist agency to find a senior technical employee. Price the role you’re actually filling.

The true cost of an employee earning £35,000

Below is a simplified calculation that helps you understand the real cost of employing a typical employee on a salary of £35,000 during the 2026/27 tax year.

The £35,000 is gross salary, so Income Tax and the employee’s own National Insurance and pension contributions are deducted from it rather than added to your bill. The employer contributions shown in the table are the extra cost.

The calculation assumes the usual National Insurance category and minimum employer pension contribution. It doesn’t account for Employment Allowance or any special National Insurance relief.

It also excludes recruitment, equipment, software and training. If those first-year expenses came to £5,000, your total cost would rise to approximately £45,363. That £5,000 is simply an illustration. Your figure could be lower or substantially higher.

Calculate the gross profit the role must produce

If you’re hiring someone to generate additional sales, don’t compare their employment cost directly with revenue. Compare it with the gross profit those sales produce.

Imagine your employee will cost £45,000 during their first year. At a gross profit margin of 40%, they would need to support approximately £112,500 of additional revenue to generate £45,000 of gross profit.

At a 60% margin, the required revenue falls to £75,000.

Not every employee will generate sales directly. An administrator may free up fee earners to take on more work. An operations manager may reduce costly mistakes. A new recruit might allow you to stop paying an expensive subcontractor.

In those cases, estimate the costs saved or the productive time released. You’re still looking for a financial benefit, even if it doesn’t appear under the employee’s name on a sales report.

Profit doesn’t remove the cash-flow risk

A hire may make commercial sense over a full year and still put your business under pressure during the first few months.

Salary, National Insurance and pension contributions begin as soon as the employee starts. Recruitment fees and equipment may be payable earlier. Additional sales or savings may take several months to arrive.

Payment terms can also widen the gap. If the employee begins generating revenue in their second month but customers take 60 days to pay, the cash may not reach your bank account until the fourth month.

A cash-flow forecast shows when each cost falls due, when the expected benefit should begin and how much spare cash you’ll need in between.

Test the figures before making the offer

Your management accounts should give you the information needed to assess the hire, including current margins, overheads and available cash.

THP can use those figures to help you model the true cost of an employee and see what would need to change for the appointment to pay off. If you decide to proceed, our payroll outsourcing service can handle the resulting calculations, deductions and reports.

A good employee can transform what your business is able to do. It’s worth checking that your finances can support them while they get there.