Can I really claim the Employment Allowance on my first hire?

Usually yes, and it is worth up to £10,500 off your employer's National Insurance bill. The restriction that catches one-person companies is that you cannot claim where the only employee paid above the £5,000 secondary threshold is a director. Take on a genuine employee paid above that threshold and you generally become eligible, which on a £30,000 hire removes the full £3,750 of employer's NI. Two things to watch. You have to claim it through your payroll software or HMRC's Basic PAYE Tools, because it is not applied automatically. And it is a single allowance across connected companies, so if you run more than one company, only one of them can claim.

Do I have to auto-enrol a part-timer?

It depends on their age and earnings, not their hours. You must automatically enrol anyone aged 22 to State Pension age who earns more than £10,000 a year from that job. Below that, they are not automatically enrolled, but they still have the right to ask to join — and if they earn above the lower qualifying threshold of £6,240, you have to pay employer contributions if they opt in. So a part-timer on £12,000 is enrolled automatically; one on £8,000 is not, but can ask, and you would then contribute. Either way you still have to assess every employee each pay period and write to them. The assessment is not optional even when the answer is no.

Is a contractor cheaper than an employee?

On the invoice, often yes — no employer's NI, no pension, no holiday, no sick pay. In practice it depends on whether the working arrangement genuinely is self-employment. If you control what they do, when and how, and they work only for you with your equipment, HMRC may treat the relationship as employment regardless of what the contract says, and the unpaid tax and NI come back to you. The IR35 rules add a further layer where the contractor works through their own limited company. Contracting suits genuinely independent, project-based work. It is a poor way to make a permanent role look cheaper, and it is one of the more expensive mistakes to unwind.

What happens to my costs if they go off sick?

You pay Statutory Sick Pay of £123.25 a week for up to 28 weeks, from the fourth consecutive day of absence, and small employers cannot reclaim it from HMRC. On its own that is modest — around £493 a month. The real cost is that you are paying it while also paying for the work to be covered, either through overtime or through your own time. For a small team, one long absence is the scenario that turns a comfortable hire into a cashflow problem. It is worth stress-testing the forecast against a three-month absence before you commit, rather than finding out how it feels in real time.

Should I offer a lower salary with a bonus on top?

It moves risk off your fixed cost base, which for a first hire is genuinely useful — but it does not avoid the on-costs. Bonuses are earnings, so employer's NI at 15% applies to them and, depending on your scheme rules, pension contributions may too. What it does buy you is timing: you pay the variable element after the revenue has arrived rather than before. The trade-off is on recruitment. A below-market base makes the role harder to fill and easier to leave, and replacing someone in year two costs more than the bonus saved in year one. Use it to share upside, not to disguise a salary you cannot afford.

What a new hire actually costs

When owners weigh up a hire, the number in their head is almost always the salary. "Can I afford £30k?" is the wrong question — because £30,000 is not what a £30,000 employee costs. The statutory extras alone add roughly £4,500 a year, and that is before a laptop, a job ad or a single hour of training. The businesses that get caught out are the ones that only budgeted for the payslip.

Here is the whole cost, with the actual rates and thresholds that apply in the 2026–27 tax year, and a worked example you can copy for your own numbers.

Start with the legal floor, not the number you had in mind

Whatever you had planned to pay, you cannot go below the National Minimum Wage. From 1 April 2026 the rates are £12.71 an hour for workers aged 21 and over, £10.85 for 18 to 20-year-olds, and £8.00 for under-18s and apprentices in their first year. An apprentice aged 19 or over who has finished the first year of the apprenticeship moves onto the rate for their age.

Run that through a standard week and the floor is higher than most owners expect. At 37.5 hours a week for 52 weeks, £12.71 an hour is £24,784.50 a year before a penny of on-cost. If your business case for a full-time hire assumed £22,000, the business case needs redoing rather than the advert.

The two costs that land automatically

Employer's National Insurance. You pay secondary Class 1 NI at 15% on everything you pay an employee above the secondary threshold of £5,000 a year (£96 a week). Those figures took effect on 6 April 2025 and apply through 2026–27. It comes out of your bank account, not theirs, and it does not appear anywhere on the employee's payslip — which is precisely why it gets missed at the budgeting stage.

The Employment Allowance can wipe that out. Eligible employers reduce their annual employer's NI bill by up to £10,500. The catch that matters for a first hire: you cannot claim it if the only person you pay above the secondary threshold is a single director. Take on one genuine employee and that restriction usually falls away — so the first hire in a one-director company can often carry no employer's NI cost at all. You have to claim it; it does not apply itself.

Workplace pension. Auto-enrolment is not optional. You must enrol any employee aged 22 to State Pension age earning more than £10,000 a year, and pay a minimum employer contribution of 3% of qualifying earnings — the slice of pay between £6,240 and £50,270. The employee adds 5%, making 8% in total. The Pensions Regulator does follow up on employers who skip it.

The worked example: a £30,000 hire

Illustrative figures, chosen to be easy to follow — a full-time employee aged 25 on a £30,000 salary, 2026–27 rates:

Gross salary: £30,000
Employer's NI: (£30,000 − £5,000) × 15% = £3,750
Employer pension: (£30,000 − £6,240) × 3% = £713
Statutory total: £34,463 — or £30,713 if the Employment Allowance covers the NI

So the on-costs are between 2.4% and 14.9% on top of the salary, and which end you land on depends entirely on whether you can claim the Employment Allowance. That single question is worth £3,750 a year on this hire. It is the first thing to settle, not the last.

Then the year-one costs that never reach a payroll report:

Recruitment. A job ad, or an agency fee typically quoted as a percentage of first-year salary. Plus your own hours sifting and interviewing.
Kit and licences. Laptop, phone, software seats, tools, PPE, a desk — whatever your trade's version is.
Ramp-up. Assume three months at roughly half output. On a £34,463 all-in cost that is about £4,308 of pay for work you did not get — plus the senior hours spent training, which are your most expensive hours in the business.

What isn't on the payslip but is still your bill

Employers' liability insurance. A legal requirement from the day you become an employer, with cover of at least £5 million. The penalty for going without it is up to £2,500 for every day you are not properly insured. Sort it before the start date, not after.

Statutory Sick Pay. £123.25 a week, payable for up to 28 weeks, and it comes out of your pocket — small employers cannot reclaim it from HMRC. Budget for the possibility rather than being surprised by it.

Holiday cover. Full-time employees are entitled to at least 5.6 weeks of paid holiday — 28 days for someone working five days a week, which an employer may count bank holidays towards. The pay itself sits inside the salary. What sits outside it is the cost of covering the work while they are off, which in a small team means your time or someone's overtime.

The day-rate check that makes it real

A five-day employee is contracted for 260 days a year and takes 28 of them as holiday, leaving 232 working days. Divide the all-in cost by that:

£34,463 ÷ 232 = £148.55 a day (no Employment Allowance)
£30,713 ÷ 232 = £132.38 a day (allowance claimed)

Now ask the only question that matters: is a day of this person's work worth more than £148.55 to the business? That is a far easier question to answer honestly than "can I afford £30k?" — and it is the one owners get right.

The decision rule

A hire has to pay for itself out of gross profit, not turnover. Take the all-in annual cost and divide it by your gross margin percentage. On a 40% gross margin, a £34,463 hire needs £86,158 of additional sales a year to break even — about £7,180 a month. If you cannot see where that comes from within a year, the hire is a bet, not a plan. That is sometimes the right call, but you should know which one you are making.

Do this before you place the advert

Check whether you can claim the Employment Allowance. If you are currently a sole director on payroll, you cannot — but this hire may change that.
Work out the all-in figure: salary + 15% of everything above £5,000 + 3% of everything between £6,240 and £50,270.
Divide it by 232 to get the day rate, and sense-check it against the value of the work.
Divide it by your gross margin to get the sales the hire has to generate.
Get employers' liability cover in place, and put the hire into a cashflow forecast at full cost from month one — not at the ramped-up productivity you are hoping for.

This is exactly the sum we run for clients before they commit. Our Payroll & Pensions service handles the mechanics from the first payslip onwards, the hiring your first employee guide covers the paperwork side, and if you are growing past the point where ad-hoc sums cut it, a Virtual Finance Team puts the numbers on decisions like this before you make them. If a hire is on your mind, book a discovery call and we will put a real number on it together.

What a new hire actually costs (it's more than the salary)