Hiring your first employee is one of the biggest steps a small business can take. It is also one of the most commonly mispriced. Most owners budget for the salary they put in the job advert, agree a figure with the successful candidate, and assume that is the cost covered. It is not. Once employer National Insurance, workplace pension contributions, insurance, payroll and paid holiday are added, the true bill is typically 10 to 20 per cent higher than the headline salary — and in 2026/27, with employer National Insurance at 15 per cent, the gap is bigger than it used to be.
This guide works through every cost that sits on top of the salary, with the current 2026/27 rates, and a worked example you can copy for your own numbers.
The headline salary is only the starting point
Your employee’s gross salary is what they earn before their own income tax and National Insurance are deducted. Those deductions come out of the employee’s pay, not your pocket. What catches first-time employers out is the second layer: the charges that are legally yours, paid on top of gross pay and never shown in the job advert. There are two big ones — employer National Insurance and pension contributions — plus a tail of smaller costs that are easy to forget until the invoices arrive.
Employer National Insurance: the biggest add-on
Employer (secondary) Class 1 National Insurance is charged at 15 per cent on everything your employee earns above the secondary threshold of £5,000 a year (£417 a month). That threshold fell sharply in April 2025, which means National Insurance now starts biting on relatively modest salaries.
The maths is simple. On a £40,000 salary, you pay 15 per cent of £35,000 — the amount above the threshold — which comes to £5,250 a year. On a £30,000 salary it is 15 per cent of £25,000, or £3,750 a year. This is a real cash cost, paid to HMRC through your payroll every month, and it does not reduce the salary you owe the employee by a penny.
The Employment Allowance can wipe out the bill
There is significant help available. Most small employers can claim the Employment Allowance, worth up to £10,500 a year in 2026/27, which is set directly against your employer National Insurance bill. For a business hiring its first employee on £40,000, the allowance would cover the entire £5,250 charge, leaving nothing to pay until your wage bill grows.
Three things to know about the allowance:
- It is not automatic. You have to claim it through your payroll software, and claim again each tax year.
- A limited company where the only employee paid above the threshold is a director cannot claim it — the classic one-person company is excluded.
- Since April 2025 there is no longer a £100,000 previous-year National Insurance cap, so more employers qualify than before.
Even with the allowance, budget for the gross figure first and treat the relief as a bonus once your claim is confirmed. That way a rejected claim never becomes a cash flow crisis.
Workplace pension: at least 3 per cent on top
If your new employee is aged between 22 and State Pension age and earns more than £10,000 a year, you must automatically enrol them into a workplace pension scheme. You cannot contract out of this, and you cannot ask the employee to opt out on your behalf — the choice is theirs alone.
Minimum contributions are 8 per cent of qualifying earnings, of which you must pay at least 3 per cent. Qualifying earnings are the slice of pay between £6,240 and £50,270 a year in 2026/27 — not the full salary. On a £40,000 salary, qualifying earnings are £33,760, so your minimum employer contribution is £1,013 a year. On £30,000 it is £713 a year.
Many employers choose to contribute more than the minimum, or to calculate contributions on the whole salary rather than the qualifying band, because it makes the job offer more attractive. That is a legitimate choice — just make it knowingly, because on a larger salary the difference can be worth £1,000 a year or more. You also need to register with The Pensions Regulator and file a declaration of compliance within five months of your duties starting.
Check your pay against the 2026 minimum wage rates
Before you settle on a salary, check it against the legal floor. From 1 April 2026 the National Living Wage for workers aged 21 and over is £12.71 an hour. The rate for 18 to 20 year olds is £10.85, and for 16 to 17 year olds and apprentices it is £8.00. A full-time employee working 37.5 hours a week at the National Living Wage earns £24,785 a year before tax — and that is before your employer National Insurance and pension costs are added on top.
Remember too that these rates rise every April. The April 2027 rates are expected to be confirmed around this week’s Autumn Budget, on Wednesday 28 October, so if you are hiring now, build an assumed pay rise into next year’s numbers rather than budgeting on today’s rate for the next eighteen months. If your business model only works at exactly the minimum wage with no room to move, that is a warning sign worth taking seriously.
The costs people forget
Beyond National Insurance and pensions, a first hire brings a cluster of smaller obligations:
- Employers’ liability insurance. This is compulsory from the day your employee starts, with at least £5 million of cover. Not having it can mean a fine of up to £2,500 for each day you are uninsured.
- Payroll itself. You must register as an employer with HMRC before the first payday, run payroll using recognised software, and report payments on or before each payday. The software, or a bookkeeper or accountant to run it for you, is a monthly cost. PAYE and National Insurance are normally due to HMRC by the 22nd of the following month.
- Paid holiday. A full-time employee is entitled to at least 5.6 weeks of paid holiday a year — 28 days including bank holidays. That is roughly six weeks of the year where you are paying for work nobody is doing, and possibly paying again for cover.
- Equipment, training and recruitment. A laptop, phone, software licences, any advertising or agency fee, and your own time spent interviewing and inducting. These are one-off or occasional, but they land in the first month, when cash is tightest.
- Statutory payments. Sick pay, maternity or paternity pay and similar entitlements can become your cost at short notice. Keeping a buffer, as you would in a business budget, is what stops one absence becoming a crisis.
Worked example: the true cost of a £40,000 hire
Here is the full picture for one full-time employee on £40,000 in 2026/27, before equipment and other extras:
| Cost | Annual amount |
|---|---|
| Gross salary | £40,000 |
| Employer National Insurance (15% above £5,000) | £5,250 |
| Employer pension (3% of £33,760 qualifying earnings) | £1,013 |
| Total statutory cost | £46,263 |
| Total if Employment Allowance claimed | £41,013 |
So the realistic uplift is around 16 per cent before the Employment Allowance, and roughly 2.5 per cent after it. Add insurance, payroll software and equipment, and a sensible planning figure for most first hires is the salary plus 10 to 20 per cent, depending on whether the allowance applies to you.
Run the same exercise with your own salary figure before you advertise the role, and feed the result into your working capital planning — payroll is a fixed monthly commitment that has to be met in quiet months as well as busy ones.
Can you actually afford to hire?
A useful test is to ask what extra revenue this employee needs to generate — or free you up to generate — to cover their full cost, not just their salary. Your break-even analysis will move the moment a salary is added, because your fixed costs have just stepped up permanently. Work out the new figure before you sign anything.
If the numbers are tight, consider whether a part-time hire, a fixed-term contract to cover a busy period, or an apprentice at the £8.00 apprentice rate would get you most of the benefit at lower risk. What you should not do is hire on a full-time salary and hope the revenue catches up. Hope is not a payroll strategy, and wages are the one bill you can never pay late.
Your pre-payday checklist
Before your new employee’s first payday, make sure you have:
- Registered as an employer with HMRC and set up PAYE.
- Checked the employee’s right to work in the UK.
- Issued a written statement of employment particulars — this is a day-one right.
- Set up a workplace pension scheme and know your auto-enrolment duties.
- Bought employers’ liability insurance with at least £5 million of cover.
- Claimed the Employment Allowance through your payroll software, if you are eligible.
- Put the true monthly cost — salary, National Insurance, pension — into your cash flow forecast.
Do those seven things and your first hire becomes what it should be: a sign the business is growing, planned for properly, rather than an expensive surprise that unfolds one payday at a time.
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