Payroll and employer costs

Salary negotiations only cover part of the picture. When you hire, the business also carries employer National Insurance, a workplace pension contribution, and sometimes the apprenticeship levy. Understanding the full cost is essential before you budget for a hire — and it changes what an offer really costs you.

The three costs on top of salary

1. Employer National Insurance — 15% on earnings above £5,000 a year (2026/27)
2. Employer pension — at least 3% of qualifying earnings under auto-enrolment
3. Apprenticeship levy — 0.5% of the paybill, only over £3 million

Example. You offer someone £40,000. Employer NI is 15% of £35,000 = £5,250. Employer pension at 3% is £1,200. That’s £46,450 before the allowance. The £5,000 Employment Allowance cuts the employer NI to £250, so the total cost is about £41,450 — roughly £3,454 a month.

The Employment Allowance

The £5,000 Employment Allowance takes that same amount off your employer NI bill each year, and most employers qualify. Claim it once per business (or group) through your payroll software. It’s the main reason small employers often pay no employer NI at all — a £40,000 employee costs little more than the salary once it’s applied.

What the employee actually keeps

The other half of the picture is that the employee doesn’t receive the gross salary either. Tax, employee NI, their pension and any student loan come off before payday. For a £40,000 employee the take-home is typically around £29,000–£30,000 — while the business pays over £41,000. The gap is tax and pensions, and it’s entirely normal.

Salary sacrifice: the shared saving

If the pension is paid via salary sacrifice, the employee’s salary is reduced by their pension contribution before tax and NI are calculated. That lowers both the employee’s and the employer’s NI bills — a rare arrangement where everyone gains. Payroll software handles the mechanics; the payroll calculator shows the saving.

The hiring checklist

1. Quote a full cost — salary + employer NI + pension before comparing candidates
2. Claim the Employment Allowance — it’s free money off your NI bill
3. Set up auto-enrolment — 3% employer / 5% employee as a baseline
4. Check the levy — only relevant above a £3m paybill

Why a bonus month costs more than you think

NI is charged per pay period, not on the annual total. If a monthly-paid employee earns £40,000, their usual month stays under the NI limits — but the month a bonus lands in can cross the Upper Earnings Limit, dropping the NI rate from 8% to 2% part-way through that period. The result: part of the bonus is charged at 2% employee NI rather than 8%, and the employer pays 15% NI on the bonus as it lands. The payroll calculator has a bonus mode that reproduces the exact per-period spike.

Benefits in kind trigger Class 1A

Provide a company car or private medical cover? Taxable benefits in kind attract Class 1A NIC at 13.8%, paid by the employer, on top of everything else. It’s reported on the P11D(b) after the year end — a real cost many businesses discover late.

Directors pay NI on the annual basis

Company directors are the exception to per-period NI: they pay employee NI on a cumulative annual basis. The numbers come out similar for stable salaries but differ around bonuses and changes mid-year. The payroll calculator applies the annual basis when you flag a director.

Statutory payments: what you can reclaim

When staff are off sick or on family leave, you pay Statutory Sick Pay (SSP) or Statutory Maternity Pay (SMP) and similar amounts:

• SSP — £123.25 a week (2026/27), up to 28 weeks. It is a pure employer cost; it can no longer be recovered from HMRC.
• SMP and family payments — recovered from HMRC, 92% for most employers, rising to 109% for small employers whose Class 1 NI was £45,000 or less in the previous tax year.

Running the whole payroll

A single salary is only half the story once you have a team. The £5,000 Employment Allowance is claimed once per business, not per employee, so the true payroll cost is the whole run: everyone’s tax and NI collected together, employer NI after the single allowance, plus pensions and Class 1A. The payroll run calculator adds your staff in one place and shows the monthly HMRC payment and total employment cost for the team.

See the maths

Use the payroll calculator for the exact cost of any salary (and any bonus), the payroll run calculator to cost a whole team, the payslip calculator to reproduce an employee’s real payslip for a specific period with SSP and SMP, and the salary calculator to see the take-home pay on the other side.