How much does an employee really cost?▾
The true cost of an employee is typically 1.25x to 1.5x their salary. On top of the salary, employers pay National Insurance (13.8%), pension contributions (minimum 3%), plus recruitment, training, equipment, software, office space, and benefits. For a £40,000 salary, the true annual cost is typically £50,000-£60,000.
What is employer National Insurance?▾
Employers pay Class 1 National Insurance at 13.8% on employee earnings above the secondary threshold of £9,100 per year. There is no upper limit. For a £40,000 salary, the employer NI is approximately £4,264 per year.
What is the minimum employer pension contribution?▾
Under auto-enrolment, the minimum employer pension contribution is 3% of qualifying earnings. Qualifying earnings are between £6,240 and £50,270 (2025/26). Many employers contribute more than the minimum, especially for senior roles.
How many productive hours are there in a year?▾
The standard calculation uses 1,720 productive hours per year. This is based on 52 weeks minus 5.6 weeks holiday, minus 1 week average sick leave, minus 1 week training/development. Of the remaining hours, approximately 80% are productive (excluding meetings, admin, breaks).
What recruitment costs should I budget for?▾
Recruitment costs typically range from 10-25% of the first year salary. This includes job advertising (£200-2,000), recruitment agency fees (15-25% of salary), interview time, background checks (£50-200), and management time. For a £40,000 role, budget £4,000-£10,000.
What equipment does a new employee need?▾
Typical equipment costs for a new employee range from £1,000-£3,000 for an office worker. This includes a laptop (£800-1,500), monitor (£200-500), desk and chair (£300-600), peripherals (£100-200), and potentially a mobile phone (£200-500).
Is it cheaper to hire an employee or a contractor?▾
Contractors have a higher day rate but no ongoing costs (no NI, pension, holiday, sick pay, equipment, or training). An employee on £40,000 costs roughly £235/day including all overheads. A contractor at £350/day may still be cost-effective for short projects. For roles lasting over 6-12 months, employees are usually cheaper.
What office space costs should I include?▾
Office space costs per employee vary hugely by location. In London, expect £500-1,000/month per desk. In regional cities, £200-400/month. This includes rent, business rates, utilities, cleaning, and facilities. Hybrid working can reduce this to £100-300/month with hot-desking.
What software licenses does each employee need?▾
Common per-employee software costs include: Microsoft 365 (£100-250/yr), email security (£30-60/yr), project management tools (£100-200/yr), communication tools (£50-120/yr), and industry-specific software. Total software cost is typically £500-1,500 per employee per year.
How do I calculate cost per productive hour?▾
Divide the total annual employment cost (salary + all overheads) by the number of productive hours (typically 1,720). For an employee costing £50,000/year in total, the cost per productive hour is approximately £29. This is the rate you need to charge clients to break even on that employee.