Taking on your first employee is a big step. As well as their pay, you take on legal duties and extra costs that are easy to underestimate.
This post gives an overview of what is involved and what an employee really costs, so you can plan before you advertise.
What is involved
Check they will be an employee. Employment status affects tax, rights and your duties. It is different from using a self-employed contractor.
Pay at least the minimum wage. From 1 April 2026 the National Living Wage for workers aged 21 and over is £12.71 an hour.
Check their right to work in the UK before they start.
Give them a written statement of their main terms by their first day.
Get Employers' Liability insurance. Most employers must have it from the first day.
Register as an employer with HMRC and run payroll, reporting each payment to HMRC.
Set up a workplace pension. You must enrol staff aged 22 to State Pension age who earn at least £10,000 a year and normally work in the UK, and pay into it.
Know the statutory pay rules. Since April 2026, Statutory Sick Pay is payable from the first day of sickness.
Make the workplace safe. Health and safety, fire safety and data protection rules apply once you employ people.
We can handle the payroll, HMRC registration and pension set-up for you.
What an employee costs
The salary is only part of the cost. The two main extras are:
Employer National Insurance: 15% of pay above £5,000 a year.
Workplace pension: at least 3% of qualifying earnings, which for most schemes is pay between £6,240 and £50,270 a year.
Example: one employee on £25,000 a year, working 37.5 hours a week (about £12.82 an hour)
Salary: £25,000.00
Employer National Insurance: (£25,000 − £5,000) × 15%: £3,000.00
Employer pension: (£25,000 − £6,240) × 3%: £562.80
Total yearly cost: £28,562.80
The example assumes the employee is aged 22 or over, works the full tax year, and that your pension scheme uses qualifying earnings. It uses annual figures to keep it simple; in practice, both are worked out each pay period. At 40 hours a week, £25,000 would be below the minimum wage for someone aged 21 or over.
The Employment Allowance can help. It reduces your employer National Insurance bill by up to £10,500 a year. If you are eligible, it would cover the £3,000 in this example, bringing the total to £25,562.80. If you run a company where you are currently the only director on the payroll, taking on an employee (who doesn't need to be a director) paid above the £5,000 threshold can make the company eligible, if it meets the other conditions.
Also budget for Employers' Liability insurance, payroll software or payroll services, and holiday and sick pay cover.
Summary
Before you hire, check you can meet the legal duties and afford the full cost, which is more than the salary. Employer National Insurance and pension add around 14% in the example above, before any Employment Allowance.
If you would like us to set up your payroll and pension, or work out the cost of a new hire, book a call or contact us.