Financial Planning9 October 20265 min read

What an Employee Really Costs: Employer NI, Pension, and the Allowance Nobody Mentions

The salary times 1.4 rule is wrong in both directions. Employer NI, the pension band and the Employment Allowance, worked through on three salaries.

Most advice on the cost of a hire hands you a multiplier. Take the salary, multiply by about 1.4, there is your real cost. It is a reasonable starting point and it is wrong in both directions: too high for a small employer who can claim the Employment Allowance, too low for a senior hire, and silent about the one part of the calculation that moves the answer most.

Here is what actually sits on top of a salary, and how to work out your own number.

The two costs you cannot opt out of

Employer's National Insurance runs at 15% on everything the employee earns above £5,000 a year, and there is no upper limit. The employee's own NI drops to a lower rate once their earnings pass a ceiling. Yours never does: it stays at 15% on every pound above the threshold, however senior the hire.

The workplace pension is a minimum 3% employer contribution, and this is the bit most people get wrong: it is not 3% of salary. It is 3% of qualifying earnings, the slice between £6,240 and £50,270 a year. On a £30,000 salary that is 3% of £23,760, not 3% of £30,000. Above £50,270 the minimum contribution stops growing at all.

Those two are mandatory. The rest of what people fold into the multiplier, recruitment fees, a laptop, software licences, training, is real but you choose the amount, so count it yourself rather than assuming a percentage.

Three salaries, three different answers

The three salaries below are illustrative. The on-costs beside them are not: they are worked out on the rates in force as this is written.

A £14,000 part-time salary: £1,350 of NI and £233 of pension. Total cost £15,583, which is 11.3% on top of salary.
A £32,000 salary: £4,050 of NI and £773 of pension. Total cost £36,823, which is 15.1% on top, or £3,069 a month.
A £60,000 salary: £8,250 of NI and £1,321 of pension. Total cost £69,571, which is 16.0% on top.

The percentage climbs as the salary does, which is the opposite of what one flat multiplier implies. Two things cause it. The £5,000 NI threshold is a fixed amount, so it shelters a far larger share of a small salary than a large one. And the pension band has a top, so above £50,270 the pension stops rising while the NI carries on.

So work the on-costs out on the actual salary every time, rather than scaling the number you used for the last hire.

The allowance nobody mentions

The Employment Allowance can take up to £10,500 a year off your employer NI bill, if your business is eligible.

Look again at the £32,000 example. The employer NI on it is £4,050 for a full year. For an eligible business whose total employer NI bill is under the allowance, that £4,050 is covered, and the real statutory on-cost of the hire falls to the £773 pension contribution. That is about 2.4% on top of salary rather than 15.1%.

That is a big enough difference to change a decision, so two warnings come with it. Not every business can claim it, and the eligibility rules are worth confirming with your accountant or on GOV.UK before you budget on them. And it is one annual amount for the business, not one per employee, so a growing payroll uses it up: the first hire can be fully sheltered while the fourth gets nothing.

Our own employer cost calculator shows the figure before any allowance, because it cannot know whether you qualify. Read its total as the ceiling, not the expectation.

A contractor is a different sum, not a cheaper one

A contractor's cost to you is the fee, and that is the whole of it. No employer NI, no auto-enrolment duty, because their own company deals with both.

So when you compare the two, compare the fully loaded cost of the employee against the fee, never the salary against the fee. That £32,000 salary costs £36,823 a year once loaded, so £3,069 a month. A contractor quoting £3,069 a month is costing you the same, not more. Whether the status is right for the work is an IR35 question for your accountant rather than a budgeting one.

The number that actually decides it

Divide the fully loaded annual cost by twelve and add it to your monthly cost base. Then ask a sharper question than "can we afford this": ask which months you cannot afford it. The hire is uncovered in any month where revenue falls below your new cost base, and that threshold, rather than the salary, is the figure to hold against your worst month of the last year. If that month would have left the hire uncovered, you are not deciding whether to hire, you are deciding whether you can carry a few bad months. Can I afford to hire another employee covers the cashflow timing half of the same decision.

Every one of these numbers changes in April

The rates above are correct as this was written and they move most years, so if you are reading this some months on, take the structure and check the figures. The calculator reads its rates from a single place in our code, which is why it stays current when an article does not. CFO Pal's what-if modelling works employer NI and pension out from that same file, and passes on the Employment Allowance caveat rather than leaving it out, because a hiring answer that quietly uses last year's law is worse than no answer at all.