The Cost of Employing Someone in the UK: Employee On-Costs in 2025/26

An employee on-cost is any expense you take on as an employer that sits on top of an employee's gross salary. The term covers everything from statutory contributions you are legally obliged to pay, through to the practical costs of equipping and supporting a person to do their job.

It helps to split the on-costs into two groups. The first is mandatory on-costs: payments fixed by law that you cannot avoid, such as employer National Insurance and pension auto-enrolment. These scales predictably scale with salary, which makes them easy to budget once you know the rates. The second is hidden and indirect on-costs: recruitment fees, equipment, software, training, workspace, and the management time a new hire absorbs. These vary widely from one business to the next and are the costs founders most often underestimate.

Understanding both groups is the only way to answer the real question behind "how much does it cost to employ someone?" The headline salary tells you what the employee receives. On-costs tell you what the business actually spends.

These are the non-negotiable costs. Every UK employer pays them on qualifying staff, and for the 2025/26 tax year, they are higher than they have been in recent years.

Employer National Insurance contributions. This is the largest mandatory on-cost for most businesses, and it rose sharply in April 2025. From 6 April 2025, the employer National Insurance rate increased from 13.8% to 15%, and the secondary threshold, the point at which you start paying, dropped from £9,100 to £5,000 a year (GOV.UK). In practice, that means you now pay 15% on almost all of an employee's earnings. For a worker on the UK average salary, the combined effect of the higher rate and lower threshold pushed employer contributions up by around 25% in a single year.

Pension auto-enrolment. If you employ anyone aged 22 to State Pension age earning at least £10,000 a year, you must enrol them into a workplace pension and contribute. The legal minimum employer contribution is 3% of qualifying earnings, the band between £6,240 and £50,270 for 2025/26 (The Pensions Regulator). Many employers choose to pay more than the minimum to stay competitive, which lifts the cost further.

Statutory paid leave. Full-time employees are entitled to a minimum of 5.6 weeks of paid holiday a year, equivalent to 28 days including bank holidays. This is not a separate invoice, but it is a real cost: you pay a full-year salary for roughly 46 working weeks of output.

Statutory sick pay and parental pay. You are obliged to fund statutory sick pay, plus statutory maternity, paternity, adoption, and shared parental pay where employees qualify. These are occasional rather than constant, but they belong in any honest cost picture.

Growth and Skills Levy. This applies only to employers with an annual pay bill above £3 million, charged at 0.5% with a £15,000 allowance. Most SMEs will never pay it, but it is worth knowing it exists as you scale.

The mandatory costs are predictable. The indirect ones are where budgets quietly break, because they rarely appear as a line on a payslip.

Recruitment is usually the first and largest. An agency fee commonly runs to 15% to 20% of first-year salary, and even an in-house hire carries the cost of advertising, screening, and the hours your team spends interviewing rather than working. Then there is onboarding and equipment: a laptop, monitor, phone, and desk setup can easily total £1,000 to £2,000 before software licences for the tools the role depends on.

Beyond the first month, the costs keep accruing. Training and ramp-up time mean a new hire rarely delivers full value for the first few months while still drawing full pay. Management time is real but invisible: every hire needs supervising, reviewing, and supporting.

If you have an office, there is the per-desk cost of rent, utilities, and insurance. And because everyone takes leave, you carry the cost of holiday and sickness cover when work still needs doing.

None of these is optional in practice. Together, they can add the equivalent of 20% to 30% of salary in the first year, which is precisely why the true cost of an employee sits so far above the contract figure.

Numbers make this concrete. Take an employee on a £30,000 salary in 2025/26. The costs fall into two groups: the mandatory on-costs you cannot avoid, and the variable costs that depend on how you recruit and equip them.

Mandatory on-costs: the costs you cannot avoid

These are fixed by law and calculable to the penny.

Before you spend a penny on recruitment or equipment, the law has already added close to £4,500, around 14.9% on top of salary. That is the floor.

Variable and indirect costs: typical, but optional and varying

These are the hidden costs, and unlike the mandatory ones, they are not fixed. The figures below are illustrative and typical for an office-based hire; yours will depend on how you recruit, what tools the role needs, and whether you have an office at all. They are first-year costs, since most are heaviest at the start.

A note on these. A recruitment agency fee alone can run to 15% to 20% of salary, or £4,500 to £6,000 on this hire, if you use one, so that line can be far higher. Equally, a fully remote hire removes the workspace cost entirely. The point is not the exact figure but the scale: the variable costs typically add another 20% to 30% of salary on top of the mandatory baseline.

Putting it together: the true cost

So a £30,000 salary realistically costs around £41,500 in its first year, and closer to £44,500 if the role is office-based. The salary on the job advert told you less than three-quarters of the story.

If you want a quick rule of thumb to carry into a budget conversation, here is the short version of what every UK employer adds on top of salary in 2025/26:

Together, for a mid-range salary, these alone add roughly 14% to 16% before anything else. The percentage drifts up as salary rises, because more of the salary sits above the National Insurance threshold. It is reduced for eligible businesses claiming the Employment Allowance, and it climbs for employers who offer pension contributions or benefits above the legal minimum. As a planning baseline, budgeting around 15% to 18% on top of salary for mandatory costs is realistic for most SMEs before indirect costs are added.

The table below shows mandatory on-costs across common salary levels for 2025/26. Each figure uses the 15% employer National Insurance rate above the £5,000 threshold and the minimum 3% pension contribution on qualifying earnings. It excludes the Employment Allowance, benefits above the minimum, and all indirect costs.

A pattern stands out. Once a salary passes £50,270, the pension contribution stops rising because qualifying earnings are capped, so the on-cost percentage levels off and then dips slightly. National Insurance, by contrast, keeps climbing with every pound. For most SME roles, the mandatory add-on lands in a fairly tight 14% to 16% band, which makes it easy to forecast once you know the salary.

The figures above are a baseline. Several factors push your real cost up or down from there.

Numbers on a page are one thing; what they mean for a real business is another. ThinkLocum, a UK medical recruitment agency based in Birmingham, supplying staff to private healthcare and the NHS, faced exactly the squeeze described above: a back office of finance, administration, and candidate-management roles that was essential, detail-heavy, and expensive to scale at UK employment costs.

Rather than absorb the rising on-costs or compromise on quality, the agency built part of its team overseas. Working with Legends EOR, ThinkLocum now employs a team of six in South Africa, fully and compliantly, covering the same back-office functions while the UK office concentrates on core recruitment. The roles are employed under local law through an Employer of Record, so there was no South African entity to set up and no misclassification risk to manage.

Faced with rising on-costs, many founders ask whether a contractor is the cheaper route. On paper, the appeal is obvious. With a genuine contractor, you pay no employer National Insurance, no pension, no holiday, and no statutory sick pay. You pay an invoice and nothing else.

The reality is more complicated. Contractors charge a premium day rate precisely because they carry their own costs and security gaps, so the headline saving is smaller than it looks. They are also harder to retain, can work for competitors, and give you less control over how and when work is done.

The biggest risk is legal: the UK's off-payroll working rules (IR35) and employment-status tests mean that treating someone as a contractor when they function as an employee can expose you to back taxes and penalties. Misclassification is one of the most expensive mistakes a growing business can make.

For ongoing, core work, an employee almost always delivers better value than a contractor once the risks are priced in. The genuine challenge is not employee versus contractor, but the rising cost of employing the people you actually want to keep.

That is where a third option has become compelling. An Employer of Record lets you employ someone full-time and compliantly in a lower-cost market, with none of the misclassification risk of a contractor and none of the overhead of setting up a foreign entity. You get the control and commitment of an employee at a cost structure that UK salaries cannot match. For UK businesses watching margins erode under higher National Insurance and pension costs, it has become the natural next question once the true UK number is on the table.