Employee Cost Calculation

The cost of an additional staff member

Before recruiting a new staff member, it is essential to understand the breakdown of the additional costs and the impact on the business overheads. Preparing an employee cost calculation lets the business ensure it has the necessary financial resources for an extra employee. The three main costs for the calculation are the annual salary, workplace pension, and employer national insurance contributions.

For example, assume you recruit a new employee with an annual salary of £35,000. From April 2025 the total cost of employment to the business will be £40,363, which breaks down as follows:

Calculation of employer national insurance contributions

Understanding the calculation of employer national insurance and other payroll figures is important for small business owners. Employers pay national insurance contributions on individual employee earnings over £5,000 annually (or £416 monthly). In the above illustration, employer national insurance contributions of 15% are payable on £30,000 annually or £2,500 monthly (£2,916 less £416), which is £4,500 for the year or £375 a month.

Employer’s national insurance allowance

Most employers are eligible for the annual employer’s national insurance allowance of £10,500 (from April 2025). The national insurance allowance benefits small employers with just a few employees, significantly reducing the national insurance costs to the business. Limited companies with one director who is the only employee aren’t eligible for the NI allowance.

To check your eligibility for the allowance:

Employment Allowance: Check if you’re eligible – GOV.UK

Calculation for workplace pension

The calculation for workplace pension contribution is based on the legal minimum contribution of 3% on eligible employee earnings. Companies can contribute a higher percentage to their employees’ pensions if they wish. Not all employees are eligible for enrolment in a workplace pension. Eligible employees are those aged 22 years and above earning over £10,000 a year. There are instances where non-eligible employees can request to join a workplace pension scheme.

New employers | The Pensions Regulator

Employers contribute to workplace pensions based on employee earnings that fall between the current thresholds of £6,240 and £50,270. In the above example, the employer makes their 3% contribution on £28,760 (£35,000 minus £6,240). When employees earn above the upper threshold of £50,270, employers still contribute 3%, but only on £44,030 (£50,270 minus £6,240). Employers do not contribute on earnings that exceed the upper threshold.

The pensions regulator has a useful calculator that works out employer workplace pension contributions:

Employer Contributions | The Pensions Regulator

Other earnings

Any other earnings employees receive such as commission must be added to their base salary for the calculations. Commission and bonuses are subject to employer national insurance and pension contributions.

HMRC calculators

HMRC has a handy calculator to work out both employee and employer national insurance contributions:

HM Revenue & Customs: Class1NICs-1 (hmrc.gov.uk)

Employee and employer NI contributions for company directors are paid at a slightly different rate to employees. The link below will take you to the HMRC calculator for the director’s NI:

HM Revenue & Customs: DirectorsClass1NICs1 (hmrc.gov.uk)