Do You Know What Your Employees Are Really Costing You?

Let’s break down what sits behind the payslip.

The Visible Cost: Gross Pay

This is the figure most people think of first; the agreed salary or hourly wage before deductions. It’s important, but it’s only part of the story.

The Less Visible Costs: Employer Liabilities

Employer’s National Insurance (NIC)

On top of gross pay, employers are usually required to pay Employer’s National Insurance Contributions (NICs) to HMRC. This is an additional 15% of the employee’s earnings above the secondary threshold - currently £5,000 a year - and is not deducted from the employee’s pay. It is an extra cost to the business.

Employer Pension Contributions

If your employee is enrolled in a workplace pension, you will be required to contribute a minimum percentage (at least 3%) of their qualifying earnings between £6,420 and £50,268 a year. Again, this is an additional employer expense rather than a deduction from the employee.

PAYE – What Actually Leaves Your Bank Account?

Your PAYE bill is made up of two components:

1. Employee deductions – Income Tax and Employee NICs (taken from the employee’s pay) along with student and postgraduate loans.

2. Employer NICs – The employer’s own contribution.

While employee deductions are funded from the employee’s salary, Employer NICs are a genuine additional business cost.

Mitigating the Cost:

Employment Allowance

Many employers are eligible for Employment Allowance (EA): a government relief that reduces your annual Class 1 Employer NIC liability.

What This Means in Practice

• Employment Allowance can offset up to £10,500 of Employer NICs per year (subject to eligibility).

• If your total Employer NIC bill is below this amount, your effective employer NI cost could be £0.

• In these cases, your PAYE payment to HMRC consists solely of employee deductions, not employer contributions.

This is particularly beneficial for:

• Small businesses

• Start-ups

• Employers with only a few staff

• Businesses with lower overall payroll totals

Recent threshold changes have widened eligibility, meaning more employers can benefit than in previous years.

Hiring under 21s

Younger employees are sometimes viewed as higher risk due to limited work experience. However, they can also be a significant asset, often bringing adaptability, enthusiasm, and the opportunity to be trained from the outset to match your business’s specific processes and culture.

In addition to development potential, there can also be direct cost savings when employing workers under 21.

• Lower National Minimum Wage Rates

  The National Minimum Wage for under-21s is lower than the National Living Wage for workers aged 21 and over.
  For example (2026/27 rates):

  • Age 18–20: £10.85 per hour

  • Age 16–17: £8.00 per hour

  This can make a noticeable difference to overall staffing costs, particularly for entry-level or training roles.

• Employer National Insurance Relief

  Employers pay 0% Employer National Insurance on earnings up to the Upper Secondary Threshold for employees under the age of 21.
  This can represent a saving of up to 15% compared with standard Employer NI rates, depending on salary levels.

• Pension Contributions

  Automatic enrolment into a workplace pension generally applies from age 22 (subject to earnings thresholds).

  This means that employees aged under 22 are not automatically enrolled, and unless they choose to opt in, employers are not required to make pension contributions. This can reduce employer costs by a further 3% of qualifying earnings.

Why This Matters

Understanding true employment cost helps you:

• Price your services accurately

• Forecast cashflow more reliably

• Decide when you can afford to hire

• Avoid surprises at payroll or year-end

• Take advantage of available reliefs

The Takeaway

An employee’s salary is only the starting point. The real cost includes Employer National Insurance and pension contributions, but for many small employers, Employment Allowance or hiring school leavers and younger workers can significantly reduce or even eliminate the employer NI element.

Knowing your numbers isn’t just good housekeeping. It’s smart business planning.