Hiring an employee on a £35,000pa salary doesn’t cost your business £35,000 a year.
It sounds obvious, but the difference between salary and the true cost of employment can easily be underestimated when businesses are budgeting for growth. Employer National Insurance, pension contributions and recruitment costs all add to the bill, before you’ve considered equipment, training, benefits or the time it takes for someone to become fully productive within your organisation.
For a small or medium-sized business, that distinction matters. One new employee might represent a significant increase in your monthly overheads, and hiring three or four people based solely on their advertised salaries could leave a sizeable hole in your cash flow forecast.
So, before you advertise your next vacancy, what should you include in your calculations?
Start with salary – but don’t stop there
If you’re employing someone on an hourly basis, you also need to make sure your calculations reflect the current National Minimum Wage. From 1st April 2026, the National Living Wage for workers aged 21 and over is £12.71 per hour. Different minimum rates apply to younger workers and eligible apprentices.
The employee’s salary should therefore be treated as your base cost, rather than the total cost of employing someone.
The formula business owners typically use to calculate the real price of a hire is:
Salary + employer taxes + pension + benefits + recruitment + onboarding + equipment + other employment costs
Some of these expenses can be calculated relatively precisely, while others require sensible assumptions based on your business, the position you’re filling, and how long it will take for the person to get up to speed.
Add employer National Insurance
Employer National Insurance contributions (NICs) are one of the biggest additions to an employee’s headline salary.
For the 2026/27 tax year, most employers pay Class 1 secondary National Insurance at 15% on earnings above the £5,000 annual Secondary Threshold (which works out at £96 per week).
For example, if you ignore any reliefs or special NI categories, an employee earning £35,000 would create an approximate employer NI liability of:
£35,000 – £5,000 = £30,000
£30,000 × 15% = £4,500
Your £35,000 employee is therefore already costing approximately £39,500 before any other costs are taken into account.
There are exceptions and reliefs that can change the calculation, including different rules for certain younger employees, apprentices and veterans. Some businesses may also be eligible for Employment Allowance, too. Make sure your forecast reflects what your business will actually pay rather than automatically applying a blanket percentage.
Don’t forget workplace pension contributions
Automatic enrolment creates another ongoing cost. For most qualifying workplace pension schemes, employers must contribute at least 3% of an employee’s qualifying earnings. In many schemes, qualifying earnings are currently those between £6,240 and £50,270 per year.
Using our £35,000 employee as a simple example:
£35,000 – £6,240 = £28,760
A 3% employer contribution would therefore be approximately:
£28,760 × 3% = £862.80 per year
The exact figure will depend on your pension scheme. Some employers also choose to offer more generous pension contributions as part of their benefits package – this can be yet another way to attract good talent.
Our £35,000 employee has now reached an illustrative direct annual cost of around £40,363, and we still haven’t considered recruitment fees, or the practical costs of employing them.
Factor in paid holiday
Most workers are legally entitled to 5.6 weeks of paid holiday per year, equivalent to 28 days for someone working a conventional five-day week. This can include bank holidays.
For a salaried employee, holiday pay isn’t usually an additional payment on top of their annual salary, it is already contained within it. But it does matter when you’re calculating the cost of productive working time.
You’re paying someone throughout their annual leave even though they aren’t producing work during that period. Depending on the role, you might also need someone else to provide cover, work overtime or take on additional responsibilities while they’re away.
This becomes particularly important when calculating an employee’s hourly costs or how much you need to charge customers for their time.
Budget for sickness
Employees may also be entitled to Statutory Sick Pay (SSP). For 2026/27, the standard SSP rate is £123.25 per week, subject to the applicable eligibility and calculation rules.
Many employers go beyond the statutory minimum and offer contractual sick pay, such as full salary, for a specified number of days or weeks.
Again, the financial impact isn’t necessarily limited to the pay itself. An absent employee might mean paying overtime, arranging temporary cover, postponing work or accepting a temporary reduction in the work that’s being delivered.
You can’t predict exactly how much sickness absence a particular employee will take, so this isn’t about adding an arbitrary figure to every salary. Instead, look at your historical absence levels and contractual sick pay arrangements and build a realistic contingency into your budgets.
Remember other statutory pay rights
Depending on an employee’s circumstances and eligibility, you may also need to offer maternity, paternity, adoption, shared parental, parental bereavement and neonatal care pay.
For 2026/27, Statutory Maternity Pay is generally paid at 90% of the employee’s average weekly earnings for the first six weeks, followed by £194.32 per week or 90% of average weekly earnings, whichever is lower, for the remaining eligible period. The £194.32/90% calculation also applies to several other forms of statutory family-related pay.
Employers can reclaim some statutory payments from HMRC, so you shouldn’t just assume the entire amount is unrecoverable. Eligible small employers, for example, can qualify for a higher rate of recovery for certain statutory payments.
Nevertheless, extended periods of leave can create additional operational costs. Temporary cover, redistribution of responsibilities and training another employee to handle the role should all form part of your workforce planning strategy.
Calculate what recruitment itself will cost
Before your new employee has worked their first day, you may already have spent a considerable amount finding them!
Depending on how you recruit, costs could include:
- Recruitment agency fees
- Paid job advertisements
- Applicant tracking or recruitment software
- Background or DBS checks where required
- Assessment tools
- Interview expenses
- Time spent reviewing applications and interviewing candidates
The last point is particularly easy to overlook, but imagine if two directors spend four hours each reviewing applications and interviewing candidates. If their time costs the business £75 per hour, that’s another £600 of internal resource that’s been committed to filling the vacancy.
If you regularly recruit, start tracking these costs. You may discover that some recruitment channels deliver much better value than others.
Then, consider onboarding and training requirements
A new employee won’t be 100% productive from the day they start in their role. It will take them some time to understand your systems, processes, customers, products and culture. Existing employees may spend considerable time training them, while managers will usually need to provide additional supervision.
You might also pay for external training courses, professional qualifications, licences or certifications, induction programmes, health and safety training and/or specialist software training.
Remember, too, that the cost isn’t only the invoice from the training provider. There is an opportunity cost attached to the time both the new employee and their colleagues spend on onboarding.
This is why a hire that looks profitable based on salary alone can take several months to generate the financial return the employer needs to see from them to make their position viable.
Equipment and technology can add thousands more
An office-based recruit might require a laptop, monitors, mobile phone, desk, chair and other equipment before you consider software. Then there are ongoing licences for email, office staples like Microsoft 365 or Google Workspace, CRM systems, accounting platforms, cybersecurity software, project management tools and industry-specific applications.
For home and hybrid workers, you may also need to contribute towards home-office equipment or travel.
These costs should ideally be divided into one-off recruitment/onboarding costs and recurring employment costs. Doing so will make your financial forecast much more useful.
Include benefits and incentives
A £35,000 salary with no additional benefits is financially very different from a £35,000 salary accompanied by private medical insurance, enhanced pension contributions, and a performance bonus.
If you want to offer them, your calculation should therefore include benefits like:
- Bonuses and commission
- Private healthcare
- Life insurance
- Company cars or car allowances
- Additional pension contributions
- Gym or wellbeing benefits
- Travel allowances
- Professional memberships
- Enhanced parental or sick pay
Consider that some employee benefits can also generate employer Class 1A National Insurance liabilities. The Class 1A rate for 2026/27 is 15%.
Don’t overlook the cost of workspace
Think about rent, service charges, utilities, insurance, furniture, parking, cleaning and other facilities costs. Even where these expenses don’t immediately increase when you make a hire, allocating an appropriate share of overheads to each employee can give you a much better picture of their true cost.
Turn all of this into a cost-per-employee figure
Once you have identified the relevant costs, it’s vital to bring them together.
For our hypothetical £35,000 employee, the initial calculation might look something like this:
- Salary: £35,000
- Employer NI: approximately £4,500
- Minimum employer pension contribution: approximately £863
- Recruitment: £2,000
- Equipment/setup: £1,500
- Training and onboarding: £1,000
- Benefits/software/other annual costs: £1,500
That takes the first-year cost to approximately £46,363 – significantly higher than you might have expected.
Go one step further: calculate the cost of productive time
Instead of asking “How much does this employee cost us each year?”, ask:
“How much does an hour of productive work from this employee cost us?”
Start with their total annual employment cost and divide it by their realistic productive hours (not just their contracted hours).
Allow for annual leave, bank holidays where applicable, training, meetings, administration and a sensible assumption for absence or other non-productive time.
This can be extremely valuable for consultancies, agencies, professional services businesses and any organisation where employees’ time is directly linked to revenue. It can help you set charge-out rates and minimum margins based on the real economics of employing someone.
Measure actual costs once you’ve hired
Your calculation shouldn’t disappear into a spreadsheet as soon as the employment contract is signed, because things change, and unexpected expenses can occur.
Compare forecast costs with actual expenditure after three, six and twelve months. Look at recruitment costs, payroll, employer NI, pension contributions, training, software, equipment and benefits, then compare those costs against what the employee was hired to achieve. Over time, this will give you much better data for future recruitment decisions.
Can you afford the employee – and does the hire make financial sense?
In our experience, these are actually two different questions.
Your cash flow forecast might tell you that you can comfortably afford another £4,000 of monthly employment costs. However, that doesn’t necessarily mean hiring someone is the best use of the money.
Before recruiting, consider the expected return. Will the person increase revenue? Improve margins? Create additional capacity? Free senior employees to concentrate on higher-value activities? OR maybe they will reduce your reliance on expensive outsourcing or overtime? And what happens if things don’t go to plan and the employee isn’t generating the return you need?
Running a few scenarios before committing to a permanent increase in your cost base can help you understand both the upside and the risk.
Look beyond the headline salary
Employees can be one of the greatest investments a growing business makes. But they’re still an investment, and that means understanding the numbers before making the commitment.
Build employer NI, pensions, benefits, recruitment, equipment, training and realistic absence assumptions into your forecasts, then track what you actually spend. If you follow this process consistently, you’ll have a much clearer answer to the two questions that really matter whenever you’re considering your next hire: what will this person genuinely cost the business, and what does the business need to gain in return?
The outsourced finance directors here at Dartcell have decades of combined experience in supporting businesses with their recruitment decisions – and we know how to predict and manage hiring costs. Contact us to see how we can help you maximise your spend and plan your recruitment strategy more effectively.