Finance⏱ 5 min read
How to Calculate Payroll Tax and Employer NI Costs
Employing someone costs significantly more than their salary. Here is the full calculation of employer National Insurance, pension auto-enrolment, and the true cost of each employee.
Many small business owners underestimate the true cost of an employee by 20-30%. Understanding payroll tax obligations before making a hiring decision prevents cash flow surprises.
Employer National Insurance Contributions
Employer NI (2024/25):
Rate: 13.8% on earnings above the Secondary Threshold
Secondary Threshold: £9,100/year (£758.33/month)
Employer NI = (Salary - £9,100) x 13.8%
Example: employee earning £35,000/year:
Employer NI = (£35,000 - £9,100) x 13.8%
= £25,900 x 0.138
= £3,574.20/year
NOTE: From April 2025, employer NI rate increased to 15%
and Secondary Threshold drops to £5,000.
2025 calculation: (£35,000 - £5,000) x 15% = £4,500/year
Auto-Enrolment Pension Contributions
Employer minimum pension contribution:
3% of qualifying earnings (earnings between £6,240 and £50,270)
For £35,000 salary:
Qualifying earnings band: £35,000 - £6,240 = £28,760
Employer minimum pension: £28,760 x 3% = £862.80/year
Employee minimum: 5% of qualifying earnings = £1,438/year
(Of which at least 1% is employee's own contribution;
government adds tax relief of 1% for basic rate taxpayers)
True Cost of Employment Summary
Employee earning £35,000/year (2024/25):
Base salary: £35,000
Employer NI: £3,574
Employer pension (3% qualifying): £863
Total employment cost: £39,437
As a multiple of salary: £39,437 / £35,000 = 112.7%
Rule of thumb: budget approximately 113-120% of salary for total cost.
At higher salaries:
£60,000 salary:
Employer NI: (£60,000 - £9,100) x 13.8% = £7,024.20
Employer pension: (£50,270 - £6,240) x 3% = £1,320.90
Total: £68,345 = 113.9% of salary
Plus additional costs to consider:
Recruitment cost: £3,000-£10,000 (agency fee 15-20% of salary)
Equipment and software: £1,000-£3,000 per year
Training: £500-£2,000 per year
Office space: £3,000-£8,000 per desk per year (London)
Employment Allowance
UK businesses can reduce employer NI by the Employment Allowance:
Amount: £5,000 per tax year (2024/25)
Eligibility: businesses where employer NI was below £100,000 in prior year
Single director-only companies: NOT eligible
Example: two employees costing £6,000 in employer NI total:
With Employment Allowance: £6,000 - £5,000 = £1,000 employer NI to pay
Saving: £5,000 in the first year
For small businesses with 2-5 employees:
Employment Allowance often covers employer NI entirely.
This effectively makes the first £5,000 of employer NI free each year.