The Real Cost of Hiring Your First Employee in the UK

Hiring your first employee is exciting. It can also be the moment when a business owner discovers that the salary in the job advert is not the full cost. Employer National Insurance, pension contributions, paid leave, insurance, payroll and equipment all need space in the budget.

This guide helps UK small companies estimate the cost and prepare the practical steps. The figures and rules were checked against official guidance on 26 October 2026 and relate to the 2026/27 tax year. Your actual cost will depend on the employee, pension scheme and circumstances.

Start with gross pay, not take home pay

Agreeing that somebody should “receive £1,500 a month” is not a reliable way to set salary. Net pay changes with their tax code, student loan, pension deductions and other personal factors. Put a gross annual salary or hourly rate in the employment terms, and confirm that it meets the applicable National Minimum Wage or National Living Wage.

If hours vary, budget from realistic paid hours rather than the quietest month. Include regular overtime, commission or bonuses. A cautious forecast also allows for training time when a new starter may not yet produce the same output as an experienced employee.

Add Employer National Insurance

For most category A employees in 2026/27, employers pay Class 1 National Insurance at 15% on earnings above the secondary threshold. That threshold is £96 a week or £417 a month. Payroll software applies the appropriate pay period calculation, so an annual estimate is useful for budgeting but is not a substitute for the payroll calculation.

Some employers can claim Employment Allowance, which can reduce eligible employer Class 1 National Insurance by up to £10,500 for the tax year. Eligibility must be checked. In particular, a company whose only employee above the secondary threshold is also a director cannot claim solely on that basis. Do not build the allowance into your forecast until you know the business qualifies.

Allow for workplace pension duties

Pension duties start on the day the first member of staff begins work, even where the employee does not need to be automatically enrolled. In 2026/27, eligible staff are generally aged from 22 to State Pension age, ordinarily work in the UK and earn at least £10,000 a year.

Under the common qualifying earnings basis, minimum total contributions are 8%, including at least 3% from the employer. For 2026/27, the qualifying earnings band remains £6,240 to £50,270. Schemes can use another compliant basis, so check the scheme rules before estimating the contribution.

Hypothetical example: a £24,000 salary

Imagine an eligible employee aged 30, paid a steady £24,000 a year, using National Insurance category A and a pension based on qualifying earnings. Employer National Insurance is approximately £2,850 for the year: 15% of the salary above the annual equivalent of the £5,000 secondary threshold. The minimum employer pension is approximately £532.80: 3% of £17,760.

The direct annual total is therefore about £27,382.80 before payroll fees, Employers’ Liability insurance, equipment, training, recruitment, paid absence and other overheads. This is a hypothetical budgeting illustration, not a payroll calculation or client case. Employment Allowance, pension postponement, pay patterns and individual circumstances could change the timing or amount.

Budget for the costs that are easy to miss

Employees have statutory holiday rights, so think about who covers the work while they are on leave. Depending on the role, you may also need a laptop, phone, uniform, software licences, travel reimbursement, training and additional workspace. Sick leave and family related leave can affect cash flow even where part of a statutory payment may be recoverable.

Employers’ Liability insurance is normally required as soon as you become an employer, with cover of at least £5 million from an authorised insurer. Make sure the workplace is safe and carry out the relevant right to work and employment checks. Provide the required written employment information and keep employee data securely.

Set up payroll before the first payday

Register as an employer with HMRC before paying staff through PAYE. Official guidance says not to register until the start date is confirmed, and the earliest point is generally two months before the first payday. Choose payroll software or a provider, gather starter information and agree a cut off date for hours, overtime and changes.

Real Time Information normally means sending the Full Payment Submission to HMRC on or before payday. Keep the PAYE and National Insurance deducted from wages separate in your cash planning, together with the employer amount, so the next payment to HMRC does not feel like an unexpected bill.

Use a three part affordability check

Before offering the role, prepare three figures: the normal monthly cost, a busier month cost with variable pay, and a cash reserve for leave or disruption. Then compare them with dependable gross profit, not just turnover or the current bank balance. Test what happens if a customer pays late or the employee needs more support than expected.

If you are planning your first hire, EvolveBooks can help with payroll, workplace pension administration and a practical cost forecast. Bring the proposed gross pay, hours, start date and role details, and we can help you organise the next steps in English or Spanish.

Explore our payroll and workplace pension services, read our guide to client profitability, or contact EvolveBooks about your first hire.