Before recruiting a new staff member, it is essential to understand the cost of an additional staff member and impact on the total business overheads. Preparing an employee cost calculation lets the business check it has the financial resources to cover the extra costs. The three main costs to calculate are the annual salary, workplace pension, and employer national insurance contributions.
For example, assume you recruit a new employee on an annual salary of £25,000. From April 2025 the total cost of employment to the business will be £28,563, consisting of :
| Salary | £25,000 |
| Employer’s national insurance | £3,000 |
| Workplace pension | £563 |
| TOTAL | £28,563 |
Calculations
It is helpful to understand the calculations behind these figures. Employer’s national insurance is 15% of monthly earnings over £416 from April 2025. In the illustration, the annual salary divided by 12 is a monthly salary of £2,083. From this amount deduct £416, which leaves £1,667, then multiply this by 15%, which is an employer monthly national insurance contribution of £250, or £3,000 a year.
The calculation for the workplace pension contribution is 3% on eligible earnings. The current thresholds for workplace pensions are £6,240 and £50,270. Pension contributions are payable on earnings falling between the two thresholds. In the above example, 3% is paid on £18,760 (£25,000 less £6,240). On salaries above the upper threshold of £50,270, the contribution is 3% of £44,030 (£50,270 less £6,240). There is no contribution on earnings above the upper threshold.
The pensions regulator has a useful calculator to work out employer workplace pension contributions:
Employer Contributions | The Pensions Regulator
Employer’s national insurance allowance
Some employers are eligible for the annual employer’s national insurance allowance of £10,500 (from April 2025). The national insurance allowance is beneficial to small employers with just a few employees, as it significantly reduces the cost of national insurance to the business.
To check your eligibility for the allowance:
Employment Allowance: Check if you’re eligible – GOV.UK
HMRC calculators
HMRC has a useful calculator to work out both employee and employer national insurance contributions:
HM Revenue & Customs: Class1NICs-1 (hmrc.gov.uk)
Employee and employer NI contributions for company directors are paid at a slightly different rate to employees. The link below will take you to the HMRC calculator for the director’s NI:
HM Revenue & Customs: DirectorsClass1NICs1 (hmrc.gov.uk)
Workplace pension
Employers are legally required to contribute a minimum of 3% to the workplace pensions of eligible staff members. Eligible employees are employees aged 22 years and over earning £10,000 and above. Some employers may choose to contribute a higher percentage to the pension as a staff benefit.
New employers | The Pensions Regulator
Other earnings
Any other earnings that employees receive such as commission must be added to their base salary in the calculations. Commission and bonuses are subject to employer national insurance and pension contributions.
UK Employee cost calculator
Use our UK employee cost calculator to estimate the cost of an employee to the business.