YF Accounting12 min read
Hiring your first employee on a £30,000 salary costs about £34,460 a year in 2026/27 once you add employer National Insurance at 15% and the 3% minimum workplace pension, and about £30,710 if your company can claim the £10,500 Employment Allowance, which taking on a first employee usually unlocks. On top of that sit the costs people forget: 28 days of paid holiday, sick pay from day one, employers’ liability insurance and the time or fee it takes to run payroll properly.
This guide puts real numbers on all of it. It covers what an employee actually costs you in 2026/27, the payroll and pension duties that start the day they do, the steps to set everything up with HMRC, the employment law changes that arrived this year, and how to decide whether now is the right time. Every rate and threshold below was checked against gov.uk on 2 November 2026.
The real cost of an employee in 2026/27
Salary is the headline, but it is not the bill. On top of gross pay you owe employer National Insurance on everything above £5,000 a year, and a minimum 3% pension contribution on earnings between £6,240 and £50,270. The income tax and employee NI you deduct from their pay are not an extra cost to you, so they are left out of the table below.
| Gross salary | Employer NI (15%) | Employer pension (3%) | Total cost | With Employment Allowance |
|---|---|---|---|---|
| £24,785 (full-time National Living Wage) | £2,968 | £556 | £28,309 | £25,341 |
| £25,000 | £3,000 | £563 | £28,563 | £25,563 |
| £30,000 | £3,750 | £713 | £34,463 | £30,713 |
| £35,000 | £4,500 | £863 | £40,363 | £35,863 |
Two things stand out. First, the on-costs add roughly 15% to any salary above the thresholds, so a £30,000 hire is really a £34,500 decision. Second, the Employment Allowance changes the picture completely for a small company, and that deserves its own section.
Employer National Insurance and the Employment Allowance
For 2026/27 employer Class 1 National Insurance is 15% of each employee’s earnings above the secondary threshold of £5,000 a year (£96 a week, £417 a month). There is no upper limit. Two groups are cheaper: for employees under 21, and apprentices under 25, the employer rate is 0% on earnings up to £50,270 a year, which makes a young first hire or an apprentice noticeably less expensive.
The Employment Allowance lets eligible employers knock up to £10,500 a year off their employer NI bill. Here is the detail that matters for a first hire: a limited company with one director cannot claim the allowance while that director is the only person paid above the secondary threshold. The moment you employ someone else who earns more than £5,000 a year, the company becomes eligible and the allowance covers the employer NI on both of you. For many owner-managed companies the first employee therefore costs less than the salary suggests, because the NI on that salary is wiped out. Our guide to claiming the £10,500 Employment Allowance walks through the claim, which is a single tick in your payroll software.
Your workplace pension duties start on day one
Automatic enrolment applies from the first day your first employee starts, which The Pensions Regulator calls your duties start date. You must put anyone aged 22 to State Pension age who earns £10,000 a year or more (£833 a month) into a pension scheme and pay into it. Staff who earn less, or who are younger or older, can ask to join, and if they earn over £6,240 a year you must contribute for them too.
The minimum contribution is 8% of qualifying earnings, which is the band between £6,240 and £50,270 a year. At least 3% must come from you; the employee pays the rest, usually 5% including tax relief. On a £30,000 salary that is £713 a year from the company. You can postpone enrolment for up to three months from the start date, which is useful for probation periods or short contracts, but you must write to the employee to tell them. Within five months of your duties start date you also have to complete a declaration of compliance with The Pensions Regulator, and there are fixed penalties for missing it. Most small employers use NEST, which has no employer setup fee, or a scheme offered by their payroll software.
The costs people forget
- Paid holiday. Every full-time employee is entitled to at least 5.6 weeks a year, which is 28 days for someone working five days a week, and that can include bank holidays. The salary already covers it, but you are paying for 232 working days of output, not 260, and you may need cover while they are away.
- Statutory Sick Pay. Since 6 April 2026 SSP is paid from the first day of sickness, not the fourth, and the old lower earnings limit has gone, so every employee qualifies. The rate is £123.25 a week or 80% of their average weekly earnings if that is lower, for up to 28 weeks. Unlike maternity pay, you cannot reclaim SSP from HMRC.
- Maternity, paternity and adoption pay. Statutory Maternity Pay is 90% of average earnings for six weeks, then £194.32 a week or 90% of earnings if lower, for a further 33 weeks. Small employers can reclaim 109% of statutory maternity, paternity, adoption and shared parental pay from HMRC if their total Class 1 NI for the previous tax year was £45,000 or less, so this cost largely washes through.
- Employers’ liability insurance. This is compulsory as soon as you employ anyone who is not a close family member, with a minimum of £5 million of cover from an authorised insurer. The fine for not having it is £2,500 for every day you are uninsured, plus £1,000 if you fail to display the certificate. For a small office or shop the premium is modest, and it is often bundled with public liability cover.
- Running payroll. Either your own time plus software, or an accountant’s fee. HMRC’s free Basic PAYE Tools exist but do not produce payslips or handle pensions well, which is why most small employers pay for software or outsource it. Our payroll service starts at £5 a month per additional employee for existing clients, and monthly payroll is included in the Growing Business package.
- Minimum wage rises. The National Living Wage is £12.71 an hour for anyone 21 or over (£10.85 for 18 to 20 year olds and £8.00 for under 18s and apprentices) and rises to £13.21 from 1 April 2027, which the Autumn Budget 2026 confirmed. Build the April increase into your budget now rather than discovering it in next year’s payroll.
- Equipment, training and recruitment. A laptop, a phone, software licences, a desk, a uniform, a DBS check if the role needs one, and the hours you spend interviewing and training. None of this is tax, but all of it is real money in the first month.
Setting up payroll: the steps in order
- Register as an employer with HMRC. You must do this before the first payday, and you cannot do it more than two months before you start paying anyone. HMRC posts your employer PAYE reference and Accounts Office reference, and both are needed to file. If the letter has not arrived by payday you can still run payroll and send a late submission afterwards, but it is far simpler to register the week the job offer is accepted. You need to register if any employee is paid £96 a week or more, gets expenses or benefits, or has another job or a pension, which in practice means almost everyone.
- Check they can work for you and sort the paperwork. Carry out a right to work check before they start, get their P45 or complete the HMRC starter checklist so you use the right tax code, and collect their National Insurance number, bank details and date of birth. The written statement of employment particulars (the core terms of the job) must be given on or before their first day, with the fuller statement within two months.
- Choose how payroll will run. Pick HMRC-recognised payroll software or hand it to your accountant. Either way, every payday you must send HMRC a Full Payment Submission on or before the day staff are paid, showing pay, tax, NI and pension deductions, and give the employee a payslip.
- Set up the pension scheme. Open the scheme before the first payday, assess the employee on their start date, enrol or postpone, write to them within six weeks, and send the first contributions over by the deadline in your scheme’s rules.
- Pay HMRC on time. The tax and National Insurance you have deducted, plus your employer NI, is due by the 22nd of the following tax month if you pay electronically (the 19th by post). If you expect to pay HMRC less than £1,500 a month you can ask to pay quarterly instead, which helps cash flow for a one-employee business.
- Diary the year-end jobs. A final submission for the tax year by 19 April, P60s to every employee by 31 May, and P11D forms for any benefits in kind by 6 July. Benefits such as a company car or private medical insurance will have to be put through payroll instead from April 2027, which our P11D guide explains. The 2026/27 tax calendar has every employer date in one place.
If you are already paying yourself a director’s salary through the company, you have a PAYE scheme and most of this is in place. Adding an employee is then a matter of the starter paperwork, the pension assessment and the Employment Allowance claim. If you want to understand what comes off each payslip, our guide to how PAYE is calculated covers tax codes and the 2026/27 bands.
Employment law changes a first-time employer needs to know
The Employment Rights Act 2025 is being switched on in stages, and several of them land on new employers. From 6 April 2026 paternity leave and unpaid parental leave became day-one rights, alongside the sick pay changes above. From 1 October 2026 the time limit for bringing an employment tribunal claim doubled from three months to six. From 1 January 2027 the qualifying period for an unfair dismissal claim drops from two years to six months for dismissals on or after that date, so a probation period that is written down, reviewed and documented matters far more than it used to. Further changes on flexible working, bereavement leave and dismissal protections for new mothers are scheduled through 2027. None of these should put you off hiring, but they do reward getting the contract and your record keeping right from the start.
Employee, contractor or apprentice: which is right first?
Before you commit to a salary, be honest about the work. If it is a fixed project with a clear end, a freelancer or contractor on an invoice may be cheaper and simpler, with no NI, pension or holiday pay. The catch is that HMRC decides employment status by what actually happens, not by what the invoice says, so someone who works your hours, under your control, with your equipment, is an employee whatever you call them. Our IR35 and employment status guide explains the tests.
If the work is ongoing, a part-time employee is a sensible first step: the thresholds are the same, so a 20-hour role at the National Living Wage pays around £13,200 a year, with employer NI of about £1,230 before the Employment Allowance and a pension contribution of about £210. An apprentice under 25 attracts no employer NI at all on earnings up to £50,270, and apprenticeship training is largely government funded, which is why so many trades start there. Whichever route you take, run the numbers against your gross margin first: a new hire should pay for themselves in extra sales or freed-up time within a few months, and if the maths does not work on paper it will not work in practice.
Where YF Accounting fits in
Most of our clients hire their first employee somewhere between year one and year three, and the setup is something we have done many times: register you as an employer, open the pension scheme, set up the software, claim the Employment Allowance and run the first payroll so nothing is missed. After that, payroll runs every month without you thinking about it: payslips to staff, submissions to HMRC, pension files to the provider and a note of exactly what to pay and when.
Fees are fixed and agreed up front. Sole traders start from £35 a month, limited companies from £50 a month, and the Growing Business package from £200 a month includes monthly payroll, bookkeeping, VAT returns and management accounts for businesses with staff. For existing clients each additional employee on payroll is from £5 a month. Full details are on our pricing page and the payroll services page, and our payroll and PAYE guide links to everything we have written for small employers. You deal with one person (me, Yoni), support is unlimited rather than billed by the hour, and we flag deadlines before they arrive rather than after. If you are about to make your first hire, Book a free call or ring 0161 531 0959 and we will put a cost on it with you before you sign the contract.
Frequently asked questions
How much does it cost to employ someone on £25,000 in 2026/27?
About £28,560 a year before the Employment Allowance: £25,000 salary, £3,000 employer National Insurance at 15% on earnings above £5,000, and £563 minimum pension contribution at 3% of earnings between £6,240 and £50,270. If your business can claim the £10,500 Employment Allowance, the NI disappears and the cost falls to about £25,560 plus insurance, equipment and your time running payroll.
Do I have to give my first employee a pension?
Yes, if they are aged 22 to State Pension age and earn £10,000 a year or more you must enrol them automatically and pay at least 3% of their qualifying earnings. Staff outside those limits can ask to join. You can postpone enrolment by up to three months, but you must tell the employee in writing, and you must complete a declaration of compliance with The Pensions Regulator within five months of your first employee’s start date whether or not anyone was enrolled.
Do I need to run PAYE if my employee earns under £96 a week?
Usually yes. You can skip registering only if every employee earns under £96 a week, has no other job or pension, and receives no expenses or benefits. Most people have had another job at some point in the tax year, which brings them into PAYE regardless of pay. Paying someone cash in hand without payroll leaves you liable for the tax and NI that should have been deducted, plus penalties, so register and run it properly from the first payday.
Does hiring an employee mean my company can claim the Employment Allowance?
In most cases, yes. A company with a single director cannot claim while the director is the only person paid above the £5,000 secondary threshold. Once a second person, your new employee, is paid above that threshold, the company qualifies and can set up to £10,500 of employer NI against the whole payroll, including the director’s own salary. The claim is made through your payroll software and can be backdated within the tax year.
What does YF Accounting charge for payroll, and how do I get started?
Payroll is included in the Growing Business package from £200 a month, and for sole trader and limited company clients each employee on payroll is from £5 a month on top of the core fee (from £35 and £50 a month respectively). Employer registration, pension setup and the Employment Allowance claim are handled as part of onboarding. To start, book a free call and we will quote one fixed figure in writing. If you already have an accountant, switching takes one email from you and we manage the handover.
Ready to make the hire? Book a free call or call 0161 531 0959 and we will set up payroll and pensions before your new starter’s first day.
Founder of YF Accounting, a fixed-fee, fully digital accountancy practice in Manchester serving SMEs, sole traders and landlords across the UK. One point of contact, unlimited support, no surprise bills.
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