Employer National Insurance rose to 15% on 6 April 2026, and the National Living Wage climbed to £12.71 an hour on 1 April 2026 [1]. Between them, those two changes lifted the cost of employing a UK worker to its highest level in more than a decade. For a small business, the salary on the contract is only the starting figure.
The full cost of payroll divides into two parts. The first is the on-cost of employment: the National Insurance, pension contributions, holiday pay and statutory pay that sit on top of gross wages. The second is the cost of running the payroll itself, whether that means software, a bureau, or the government's free tool. Both matter to the hiring decision, and both are frequently underestimated.
This guide breaks down every layer of UK payroll cost for the 2026-27 tax year. It quantifies the on-costs an employer adds to salary, sets out the minimum wage floor, explains the pension and statutory-pay commitments, and compares the ways a business can process payroll and what each approach costs.
Key takeaways
- Employer National Insurance is charged at 15% on earnings above £5,000 for the 2026-27 tax year [2].
- The National Living Wage is £12.71 an hour for workers aged 21 and over from 1 April 2026 [1].
- An employer must contribute at least 3% of an employee's qualifying earnings to a workplace pension [3].
- Employment Allowance can cut an eligible employer's National Insurance bill by up to £10,500 a year [4].
- Workers are entitled to 5.6 weeks of paid holiday a year, roughly 12.07% of hours worked [5].
- The true cost of an employee typically runs 15% or more above their gross salary once National Insurance and pension are added.
The on-cost of employment above salary
The headline salary is the visible cost. On top of it sit mandatory employer contributions that a small business cannot avoid. The two largest are employer National Insurance and the workplace pension, and together they add a predictable percentage to every salary above the relevant thresholds [6].
Consider an employee on a £30,000 salary. Employer National Insurance is charged at 15% on the pay above the £5,000 Secondary Threshold, which is £3,750 [2]. The minimum employer pension contribution is 3% of qualifying earnings, the band between £6,240 and £50,270, which on a £30,000 salary is around £713 [3]. The total on-cost is roughly £4,463, lifting the real cost of the hire to about £34,463 before any reliefs.
Employer National Insurance in detail
Employer National Insurance is the single largest add-on for most small businesses. The rate is 15% on all earnings above the £5,000 annual Secondary Threshold, a threshold that is frozen until 5 April 2028 [2]. Because the threshold sits at £5,000, an employer pays National Insurance on a large slice of pay that the employee themselves does not, since the employee only starts paying at £12,570 [7].
Some employees carry a 0% employer rate. Workers under 21, apprentices under 25 and qualifying veterans in their first civilian year attract no employer National Insurance up to £50,270, provided the correct category letter is used [7]. The table below shows how the employer charge changes across salary levels for a standard-category employee.
| Gross salary | Employer NI at 15% above £5,000 | On-cost as % of salary |
|---|---|---|
| £15,000 | £1,500 | 10.0% |
| £25,000 | £3,000 | 12.0% |
| £35,000 | £4,500 | 12.9% |
| £50,000 | £6,750 | 13.5% |
Employment Allowance offsets part of this. An eligible employer can reduce its total Class 1 National Insurance liability by up to £10,500 across the tax year, claimed through the payroll [4]. A company whose only employee liable for secondary National Insurance is a single director cannot claim, which excludes many one-person limited companies [4].
Workplace pension contributions
Auto-enrolment adds a second mandatory cost. Every employer must enrol eligible staff into a qualifying pension scheme and contribute to it [3]. An employee is eligible for automatic enrolment once they earn above the £10,000 trigger for the 2026-27 tax year [8].
The minimum contributions are fixed. The total minimum is 8% of qualifying earnings, of which the employer must pay at least 3% [8]. Qualifying earnings for the 2026-27 tax year are the slice of pay between £6,240 and £50,270 [3]. An employer can choose to contribute more, but 3% is the floor, and it is assessed on the payroll each period alongside tax and National Insurance.
The wage floor: minimum wage as a cost driver
For businesses paying at or near the legal minimum, the National Living Wage sets the cost base and it rose sharply on 1 April 2026. The rate for workers aged 21 and over is now £12.71 an hour, up from £12.21 [1]. At 37.5 hours a week, that is roughly £24,785 a year in gross salary before any on-costs are added.
The minimum wage varies by age and by apprenticeship status, and paying below the correct rate is an offence that can trigger HMRC enforcement and public naming [9]. The rates from 1 April 2026 are set out below.
| Category | Hourly rate from 1 April 2026 |
|---|---|
| National Living Wage (21 and over) | £12.71 |
| 18 to 20 | £10.85 |
| Under 18 | £8.00 |
| Apprentice | £8.00 |
These figures come from the government's confirmation of the Low Pay Commission recommendations [10]. Because employer National Insurance and pension contributions are calculated on top of gross pay, every rise in the minimum wage carries a compounding effect: the on-costs rise with it. A business modelling labour costs should treat the minimum wage as a floor that pulls the whole cost stack upward, which is why many use payroll software for small businesses to project the combined figure rather than salary alone.
Holiday pay and statutory pay
Paid leave is a cost that is easy to overlook because it does not appear as a separate line. Almost all workers are entitled to 5.6 weeks of paid holiday a year, which for a five-day week is 28 days [5]. For workers with irregular hours, holiday pay is commonly accrued at 12.07% of hours worked, reflecting 5.6 weeks as a proportion of the working year [11].
Statutory payments are a further contingent cost, though most are partly recoverable. Family-related statutory pay such as maternity, paternity and adoption pay is recoverable from HMRC at 92%, rising to 109% for small employers under Small Employers' Relief [12]. Statutory Sick Pay is the exception: since the reform on 6 April 2026 it is due from the first day of absence with no lower earnings limit, and it is not recoverable, so the employer absorbs the full cost [13].
Benefits in kind and Class 1A
Where a small business provides taxable benefits such as a company car or private medical cover, a further employer charge applies. Class 1A National Insurance is due on most benefits in kind at 15% for the 2026-27 tax year, reported after the year end [14]. This sits outside the regular payroll cycle but forms part of the total employment cost for any business offering benefits.
The cost of running the payroll itself
Beyond the cost of the people, there is the cost of processing the pay. A UK business has three broad options, and each carries a different cost profile. The cheapest is the government's free Basic PAYE Tools, which is capped at nine employees, produces no payslips and does not handle automatic enrolment assessment [15]. It sets the price floor, and any paid option has to justify its cost against it.
The second option is commercial payroll software, typically priced per employee or per payslip each month. This is where most of the 1.4 million UK employers with staff sit [16]. The third is outsourcing to a bureau, which removes the processing work but costs more per payslip and hands control of the timetable to a third party. The table below compares the three at a high level.
| Approach | Typical cost basis | Trade-off |
|---|---|---|
| Free HMRC tool | No fee | Capped at 9 staff, no payslips, no pension assessment |
| Payroll software | Per employee or per payslip | Business keeps control, handles compliance in-house |
| Payroll bureau | Per payslip, higher | Work outsourced, less direct control of timing |
For a business weighing software against outsourcing, the deciding factors are volume, complexity and how much control it wants to keep. Transparent per-payslip pricing makes the software route easy to model, and businesses processing payroll across multiple entities or clients, such as accountants, use a multi-client payroll platform to keep the per-payslip cost low at scale. Software platforms that embed payroll into their own product use an HMRC-recognised payroll API rather than paying a bureau per run.
Hidden costs of processing payroll in-house
The per-payslip or per-employee fee is the visible cost of software, but running payroll in-house carries less obvious costs too. Someone has to operate it: collecting hours, checking tax codes against HMRC coding notices, filing the Full Payment Submission on or before each payday and answering employee queries about deductions [6]. For a business without a dedicated payroll person, that time has a real cost even when the software fee is modest.
There is also the cost of getting it wrong. HMRC charges a fixed late-filing penalty starting at £100 a month for one to nine employees, and separate late-payment penalties and interest where PAYE reaches HMRC after the 22nd of the month [2]. Automating the filing removes most of that risk, which is part of the value a paid tool provides over the free option.
Payroll costs for one-person and micro businesses
The cost picture is different for the smallest employers. A one-person limited company paying only its director cannot claim Employment Allowance, so it pays the full 15% employer National Insurance on the director's salary above £5,000 [4]. Many director-shareholders manage this by setting a modest salary and taking the remainder as dividends, though the salary still has to run through a PAYE scheme if it triggers reporting.
For occasional or single-employee situations, the processing cost can be kept very low. A business that needs to produce a compliant payslip without running a full scheme every month can use an instant payslip generator, and micro-employers running regular payroll for a handful of staff often find that dedicated sole-trader payroll is cheaper than a bureau while keeping full control. For businesses weighing the two routes, this comparison of the cost of outsourcing payroll sets out the trade-offs in more detail.
Conclusion
The real cost of payroll in the UK is the sum of several layers, and for the 2026-27 tax year every layer moved upward. Employer National Insurance at 15%, a workplace pension floor of 3%, holiday pay worth 12.07% of hours and a minimum wage of £12.71 an hour combine to put the true cost of a typical employee well above their headline salary. A business that budgets on salary alone will under-provision by a wide margin.
The processing cost is the layer a business can most directly control. The choice between the free tool, software and a bureau shapes both the cash cost and the amount of compliance work carried in-house. As statutory rates and thresholds continue to rise each April, the businesses that stay ahead are the ones that model the full cost stack rather than a single number, and that automate the payroll so the on-costs are calculated correctly every period.
Frequently asked questions
How much does an employee really cost above their salary in the UK?
For a standard-category employee, the on-cost is typically 15% or more of gross salary once employer National Insurance and pension are added. Employer National Insurance is 15% on earnings above £5,000, and the minimum employer pension contribution is 3% of qualifying earnings between £6,240 and £50,270 [2]. On a £30,000 salary, that adds around £4,463, before holiday pay and any benefits are counted. Employment Allowance can offset up to £10,500 of the National Insurance for eligible employers [4].
What is the minimum wage a UK employer must pay in the 2026-27 tax year?
From 1 April 2026 the National Living Wage for workers aged 21 and over is £12.71 an hour [1]. Younger workers have lower minimums: £10.85 for 18 to 20 year olds and £8.00 for under-18s and apprentices [9]. Paying below the correct rate is an offence and can lead to HMRC enforcement and public naming.
How much does it cost to run payroll for a small business?
It depends on the route. The government's Basic PAYE Tools is free but capped at nine employees and produces no payslips or pension assessment [15]. Commercial payroll software is usually charged per employee or per payslip each month, while a bureau charges more per payslip in exchange for doing the work. The right choice depends on staff numbers, payroll complexity and how much control the business wants to keep.
Do employers get any payroll costs back from HMRC?
Some, but not all. Family-related statutory payments such as maternity and paternity pay are recoverable at 92%, or 109% for small employers under Small Employers' Relief [12]. Statutory Sick Pay is not recoverable, so since the reform on 6 April 2026 the employer bears the full cost from the first day of absence [13]. Employment Allowance is the largest offset, reducing the annual National Insurance bill by up to £10,500 for eligible employers [4].
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