When a founder hires their first employee at £35,000 a year, they think the cost is £35,000 a year.
It isn't.
The true cost of a £35,000 employee — once you account for employer National Insurance, pension contributions, holiday entitlement, statutory sick pay cover, and the admin overhead of running payroll — is closer to £41,000–£43,000. That's a 17–23% premium that most small business owners never properly plan for.
The components of true employment cost
1. Employer National Insurance (NI)
Employer NI is currently charged at 13.8% on earnings above £9,100 per year (the Secondary Threshold). For a £35,000 employee, that's roughly £3,578 in employer NI contributions alone.
Many founders confuse employee NI (deducted from the employee's pay) with employer NI (an additional cost on top of salary). They are different. Only employer NI comes out of your business.
2. Pension contributions
Under auto enrolment, employers must contribute a minimum of 3% of qualifying earnings to each eligible employee's pension. Qualifying earnings are calculated on earnings between £6,240 and £50,270.
For a £35,000 employee, qualifying earnings are approximately £28,760, making your minimum pension contribution about £863/year. Most growing businesses pay 4–5% to stay competitive.
3. Holiday pay
Full-time employees are entitled to 28 days of paid annual leave (including bank holidays in England). When you account for the fact that you're paying salary during days the employee isn't productive, this adds roughly 10–12% to the cost of their time.
4. Employer's liability insurance
Legally required once you have employees. Costs typically £500–£2,000/year depending on industry and headcount.
5. Recruitment costs
The average cost to hire a UK employee is £8,500 once you factor in job board advertising, recruiter fees (often 15–20% of first-year salary), time spent interviewing, and onboarding. This is often ignored but has a massive impact on true cost of employment.
6. Sick pay and absence cover
The UK average employee takes 4.4 sick days per year. You'll pay Statutory Sick Pay (SSP) for these days — currently £116.75/week. If you need cover, that's an additional cost. Absence management is one of the most overlooked people costs.
The total picture
| Cost component | Annual cost |
|---|---|
| Gross salary | £35,000 |
| Employer NI | £3,578 |
| Pension (min 3%) | £863 |
| Holiday cost (10%) | £3,500 |
| Employer's liability | £800 |
| **Total** | **£43,741** |
That's £8,741 more than the salary figure — and doesn't include recruitment, sick pay, or any benefits.
Why this matters for UK SMEs
If you have 20 employees averaging £35,000 salary, your actual people cost is probably £840,000–£875,000 per year — not the £700,000 the payroll number suggests.
That gap matters for cash flow planning, hiring decisions, and profitability. Most founders only discover it when they sit down with their accountant at year end.
Paply calculates your true total people cost in real time, breaking down every component so you always know the real number — not the salary figure.
Try the People Cost Calculator to see your own figure in under two minutes.