What Your First Hire Really Costs
The standard warning is that an employee costs you about 30% more than their salary. It's repeated everywhere, and for a first hire at a small UK company it's usually wrong — often by a lot.
The real number depends on one allowance most people have never heard of. Get it right and your first employee might cost you barely more than the salary you agreed. Get it wrong and you'll either over-budget and delay a hire you could afford, or under-budget and get a nasty surprise from your payroll software.
Figures are for the 2026–27 tax year, taken from GOV.UK and checked in July 2026. Every section links to its source.
The two costs on top of salary
Ignore everything else for a moment. Two things sit on top of the wage, and both are legally unavoidable.
Employer National Insurance
15% of everything the employee earns above £5,000 a year. That threshold is low enough that in practice you're paying 15% on nearly the whole salary.
Workplace pension
A minimum 3% employer contribution on qualifying earnings. Auto-enrolment applies to staff aged 22 to State Pension age earning at least £10,000 — and your duties start the day your first employee does.
Run those on a £40,000 salary and you get £5,250 of employer NI and about £1,013 of pension. Total cost £46,263. That's a multiplier of 1.16, not 1.3 — and it's remarkably stable: £25,000 comes out at 1.14x, £60,000 at 1.16x.
Sources: HMRC rates and thresholds · Workplace pensions for employers
The allowance that changes the answer
Here's the part that gets left out of most advice. Eligible employers can reduce their annual employer NI bill by up to £10,500 through Employment Allowance.
Work backwards from that. At 15% above a £5,000 threshold, £10,500 of allowance covers the employer NI on a salary of roughly £75,000. So for most first hires, your employer NI bill is not reduced — it is wiped out entirely.
What that does to the numbers
A £40,000 hire drops from £46,263 to about £41,013 — a multiplier of about 1.025 rather than 1.16. The only remaining cost above salary is the pension contribution.
Two catches, and they matter. If your company has only one director, that director must not be the only employee liable for secondary Class 1 National Insurance — so a solo founder on payroll with no staff can't claim. Taking on your first employee is often the thing that makes you eligible, which is a pleasant irony: the hire pays for part of itself.
The second catch is that the allowance is per business per year, not per employee. Once the £10,500 is used up it's gone, so your second and third hires cost the full 15%. And if you're part of a group of connected companies, only one company in the group can claim at all.
Insurance you can be fined daily for skipping
Employers' liability insurance becomes compulsory the moment you become an employer, and it must cover at least £5 million from an FCA-authorised insurer.
The enforcement is worth knowing about, because it's not a slap on the wrist. You can be fined £2,500 for every day you're not properly insured. There's a separate £1,000 fine for failing to display the certificate where staff can see it. A month of accidental non-compliance is a five-figure problem.
One narrow exemption: you don't need it if your only employee is a close family member, or someone based outside England, Scotland and Wales.
The costs that don't show up in a salary calculation
Statutory sick pay is £123.25 a week, and unlike maternity or paternity pay you cannot reclaim any of it from HMRC. Budget for it as a real, if occasional, cost rather than an edge case.
Then there's the equipment, the extra software seats, and the recruitment itself — an agency fee is typically a percentage of first-year salary, which on a £40,000 role is not a rounding error. None of this is exotic. It just tends to be forgotten until it lands.
And if you're hiring at the lower end, the National Living Wage for staff aged 21 and over is £12.71 an hour from April 2026. That's about £24,800 a year on a 37.5-hour week — roughly £28,300 once NI and pension are added, before Employment Allowance.
What to actually put in your burn rate
For a first hire, if you're confident you qualify for Employment Allowance, budget salary plus about 5% and you'll be close. If you're not sure, or you're already using the allowance, use salary plus 20% and you'll have a small cushion rather than a shortfall.
Whichever figure you land on, put the monthly version into the runway calculator before you make the offer, not after. A hire is usually the single largest permanent increase to your burn rate you'll ever make, and it's much easier to decide against one than to unwind it.
Worth running the break-even calculator too, with the new cost included. If the hire pushes your break-even point past your remaining runway, that's a decision the spreadsheet is making for you.
Usual caveat: I'm a developer, not an accountant. Employment Allowance eligibility in particular has conditions I've simplified here, and getting it wrong in either direction costs real money. The GOV.UK pages above are the authority, and a payroll accountant will settle it in one conversation.