In 2026/27 an employee costs roughly 2.3% to 15% more than their salary. Employer National Insurance adds 15% of pay above £5,000, and auto-enrolment pension adds 3% of earnings between £6,240 and £50,270, but the Employment Allowance cancels the NI for most first hires.
| Cost line | With Employment Allowance | Without it |
|---|---|---|
| Salary (illustrative first hire) | £28,000 | £28,000 |
| Employer NI: 15% above £5,000 | £0 | £3,450 |
| Pension: 3% of qualifying earnings | £652.80 | £652.80 |
| Other on-costs: insurance, kit, recruitment | Not costed here | Not costed here |
| True annual cost | £28,652.80 | £32,102.80 |
So advertise £28,000 for your first hire and the realistic all-in payroll cost is about £28,650 a year with the allowance, or about £32,100 without it. Which of those two numbers applies to you is the most useful thing to settle before you write the job ad.
One flag before the arithmetic: the £28,000 salary is illustrative - a realistic figure for a first hire in a small service firm. Every rate, threshold and percentage below is the sourced 2026/27 figure from HMRC, the DWP and gov.uk.
Employer National Insurance: 15% above £5,000
Employers pay secondary Class 1 National Insurance at 15% on everything an employee earns above the secondary threshold of £5,000 a year (£417 a month), per HMRC’s rates for employers for 2026/27.
On £28,000, that’s (£28,000 − £5,000) × 15% = £3,450 a year. This is where most “hiring costs more than you think” warnings stop. For a first hire, stopping there gets the answer wrong.
The £10,500 allowance that usually cancels it
The Employment Allowance takes up to £10,500 off your employer Class 1 NIC bill for 2026/27. It isn’t a year-end rebate: you claim it through your payroll software and it reduces the employer NIC due each pay run until it’s used up or the tax year ends. A first employee on £28,000 generates a £3,450 annual bill - well inside £10,500 - so an eligible employer pays no employer NIC at all on that hire.
Most small employers are eligible. The old exclusion for employers with a prior-year NIC bill over £100,000 was removed in April 2025; the main remaining test is doing less than half your work in the public sector. The details that matter for a first hire:
- A limited company with a single director and no other staff can’t claim while that director is the only person paid above the £5,000 threshold. Hiring a first employee paid above it typically restores eligibility - so for many one-director companies, the first hire is exactly the moment the allowance switches on.
- A sole trader taking on employee number one can claim. (If that’s you, your own tax pot is a separate sum - see How much should a sole trader set aside for tax?.)
- Connected companies share a single allowance; only one company in the group can claim. If a connected company has already used it, you’re in the “without” column below.
- It can’t be set against deemed payments for off-payroll (IR35) workers, and domestic staff are excluded - care and support workers being the exception.
Pension: 3% of qualifying earnings, not 3% of salary
You must automatically enrol any employee aged 22 to State Pension age who earns at least £10,000 a year and normally works in the UK. The legal minimum contribution is 8% of qualifying earnings, of which the employer must pay at least 3%; the employee typically makes up the remaining 5%, including tax relief.
The 3% bites on qualifying earnings - the band between £6,240 and £50,270 a year, which the DWP has confirmed it is holding unchanged for 2026/27 - not on the whole salary. On £28,000: (£28,000 − £6,240) × 3% = £652.80 a year, about £54 a month.
The two totals
- With the Employment Allowance: £28,000 salary + £0 NIC + £652.80 pension = £28,652.80 - about 2.3% above the advertised salary.
- Without it (a connected company already claimed, say): £28,000 + £3,450 + £652.80 = £32,102.80 - about 14.7% above.
That contrast is the real story. The scary “add 15% for the taxman” rule of thumb only holds for employers who can’t claim the allowance. For most genuine first hires the NIC line is zero, and the on-top cost is the pension.
Holiday changes what a week costs, not what a year costs
Statutory paid holiday is 5.6 weeks a year, capped at 28 days, so a five-day-a-week employee gets at least 28 days - and you’re allowed to count bank holidays within that, not on top. Part-timers get it pro rata: three days a week works out at 16.8 days.
Holiday sits inside the salary, so it doesn’t move the annual total. It moves what a working week costs. As illustrative framing: a full-timer is paid for about 52 weeks but works about 46.6 of them once the 28 days come out, before a single day of sickness. Divide £28,652.80 by the weeks actually worked and each one costs about £615, against the naive £537 from dividing the advertised salary across the full year - the holiday alone adds roughly 12% per productive week. If you sell that person’s time, £615 is the figure your pricing has to clear; Price the job, not the day rate covers that side of the equation.
The wage floor under all of it
From 1 April 2026 the National Living Wage for anyone aged 21 or over is £12.71 an hour; 18-to-20-year-olds get at least £10.85, and under-18s and first-year apprentices £8.00. Rates change every 1 April. On an illustrative 37.5-hour week, the NLW comes to roughly £24,870 a year (about £26,530 at 40 hours) - the legal floor for a full-time hire aged 21 or over, and the reason £28,000 is a credible worked salary rather than a lowball.
Run the sum before you write the ad
Two things this deliberately leaves out. Employers’ liability insurance is usually compulsory once you take someone on; it wasn’t costed here, so check the HSE’s guidance before the start date rather than guessing a premium. And recruitment, kit and your own time running payroll are real costs that vary too much to put an honest number on.
The takeaway is a three-line sum on your own salary figure: NIC is (salary − £5,000) × 15%; check whether the Employment Allowance zeroes it; pension is (salary − £6,240) × 3%. Our employer true-cost calculator runs it for any salary, with the one-off setup costs on top. If the allowance applies - and for a true first hire it almost always does - budget the salary plus roughly 2–3%. If it doesn’t, budget closer to salary plus 15%. Know which camp you’re in before the ad goes out, not at the first payroll run.
