We add up what a hire really costs you - not just the salary you offered.
What an employee actually costs a UK limited company
The salary is roughly 70% of the true cost. Employer National Insurance and the pension make up most of the rest.
The working
How this is worked out
The cost of an employee is the salary plus everything the company pays on top of it, less the corporation tax the whole lot saves you.
Employer cost = gross salary + employer NI at 15% on pay above £5,000 + employer pension (3% minimum on qualifying earnings) - Employment Allowance, if eligible Net of tax = employer cost x (1 - your corporation tax rate)
Two things drive most of the gap between the salary and the real number.
The first is that employer National Insurance starts at £5,000, far below the £12,570 at which the employee starts paying anything. The company is contributing on earnings the employee is not taxed on at all.
The second is the Employment Allowance, worth up to £10,500 against your employer NI bill. It changes the answer completely for a company hiring its first employee, and it is the single most valuable thing on this page for a founder going from zero staff to one.
A worked example
A £40,000 salary, in a company already paying the 25% main rate of corporation tax, with the Employment Allowance already used up by existing staff.
- Gross salary: £40,000
- Employer NI: (£40,000 - £5,000) x 15% = £5,250
- Employer pension at 3% of qualifying earnings: roughly £1,000
- Total employer cost: about £46,250
So the salary is about 86% of the cash cost. The whole amount is deductible, so at the 25% main rate the net cost after corporation tax relief is roughly £34,688.
Now the same hire in a company with the Employment Allowance available and no other staff: the £5,250 of employer NI is covered in full by the £10,500 allowance, and the cash cost drops to about £41,000. That is a materially different decision on the same salary.
| Item | 2026/27 |
|---|---|
| Employer National Insurance | 15% above £5,000 |
| Employee National Insurance | 8% from £12,570 to £50,270, then 2% |
| Employment Allowance | £10,500 |
| Personal allowance | £12,570 |
Source: GOV.UK: rates and thresholds for employers 2026 to 2027, checked 2026-08-08.
The figures used
| Item | 2026/27 |
|---|---|
| Employer National Insurance | 15% above £5,000 |
| Employee National Insurance | 8% from £12,570 to £50,270, then 2% |
| Employment Allowance | £10,500 |
| Personal allowance | £12,570 |
Auto-enrolment pension minimums are 3% employer and 5% employee on qualifying earnings, which is a band rather than the whole salary. Many employers contribute on full salary instead, which costs more than the statutory minimum and is worth checking before you compare offers.
All of these are listed together, with the GOV.UK page each came from, on our 2026/27 rates and thresholds reference.
What changes your answer
- A sole director with no other employees cannot claim the Employment Allowance. This is the exclusion that catches most founders. If the only person on the payroll is a single director, the allowance is not available, and the first real hire is often what unlocks it.
- The allowance is per business, not per employee, and connected companies share one allowance between them.
- Salary sacrifice changes the arithmetic. Sacrificing salary into a pension reduces both employer and employee NI, so the gross-to-cost ratio moves.
- This ignores everything that is not payroll. Recruitment fees, equipment, software seats, insurance, training and management time are all real and none of them appear above.
- Corporation tax relief is not cash today. It reduces a bill you pay nine months after your year end. The wage leaves your account this month.
- Employers with a payroll bill over £3m also pay the Apprenticeship Levy at 0.5%.