Employment Allowance and Hiring Costs — What a New Employer Needs to Budget For 2026/27

The salary is not the full cost

A new employer budgeting purely on the advertised salary will underestimate the real cost of hiring, often significantly. On top of gross pay, an employer is also liable for employer National Insurance, minimum pension contributions, and — as covered in a previous article — Statutory Sick Pay from day one with no earnings threshold.

Employer National Insurance for 2026/27

Employer (secondary) Class 1 National Insurance is charged at 15% on earnings above the Secondary Threshold (£5,000 per year / £96 per week for 2026/27) for most employees. This is a direct additional cost on top of gross salary — for an employee earning £30,000, that's roughly £3,750 a year in employer NI alone, before pension contributions.

The Employment Allowance — what it offsets

Eligible employers can claim the Employment Allowance, which reduces the employer National Insurance bill by up to £10,500 for 2026/27. This is claimed through payroll software, not a separate application, and effectively means many small employers pay no employer NI at all until their total employer NI liability for the year exceeds the allowance.

Not every business qualifies — broadly, employers where a single director is the only employee do not qualify, and there are also connected-company and state-aid rules to check. It is worth confirming eligibility with your payroll provider or bookkeeper before assuming the allowance applies.

Minimum pension contributions

Under auto-enrolment, most employers must enrol eligible staff into a workplace pension and contribute at least 3% of qualifying earnings, with the employee contributing at least 5% (including tax relief), for a combined minimum of 8%. This is a legal obligation, not optional, once an employee meets the eligibility criteria (broadly: aged 22 to State Pension age, earning above the qualifying earnings threshold).

National Minimum Wage — the floor, not the target

From April 2026, the National Living Wage (age 21+) is £12.71 per hour, with lower rates for 18–20 year olds (£10.85) and under-18s/apprentices (£8.00). These are legal minimums with real enforcement consequences for underpayment — HMRC can require repayment plus penalties, and can name and shame non-compliant employers.

A realistic total cost picture

For an employee on a £30,000 salary in 2026/27, a rough total employer cost (before Employment Allowance) looks like:

• Gross salary: £30,000
• Employer NI (15% above threshold): approximately £3,750
• Minimum employer pension (3% of qualifying earnings): approximately £900
• Approximate total: £34,650+, before recruitment costs, equipment, software licences, or any SSP exposure

If the Employment Allowance applies in full, the employer NI portion may be substantially or fully offset — which is exactly why claiming it correctly matters for a small employer's real bottom-line cost of hiring. If a company car is part of the package you offer, remember that Class 1A employer National Insurance on a car benefit is a separate cost again — see our guide to company car and EV tax for directors for how that is calculated.

What to set up before your first payday

• Register as an employer with HMRC and set up PAYE before the first payment is made
• Choose payroll software (Xero Payroll, QuickBooks Payroll, or a dedicated provider) that handles auto-enrolment, SSP, and NI calculations automatically
• Confirm Employment Allowance eligibility and claim it through your payroll software from the first pay run, not retrospectively
• Set up a workplace pension scheme and complete auto-enrolment duties within the statutory deadlines from the employee's start date

Getting the payroll setup right from the first hire avoids a much more painful correction exercise later, once several months of incorrect NI, pension, or SSP calculations have to be unwound.