You found the right person. You agreed the salary. You’re ready to hire. Then payroll shows you a second bill you didn’t see coming. That’s employer National Insurance, and it’s the extra cost many small business owners forget to budget for.
The good news is that it isn’t complicated. Once you know how it works, you can plan for it, shrink it and stop worrying about it. Here’s everything you need, in plain English, so your payroll costs never catch you off guard again.
What Employer National Insurance Really Is
Every employee has two National Insurance contributions attached to their pay. One comes out of their wages. The other is paid by you, on top of their salary.
That second one is employer National Insurance. Your employee never sees it on their payslip, but you pay it to HMRC through payroll, usually every month. It’s a cost of employing someone, not a deduction from their pay. So the number on the contract is never the full price of the hire.
Now let’s look at how much it actually costs.
The Rate, the Threshold and the Simple Maths
According to GOV.UK, the employer National Insurance rate for 2026 to 2027 is 15%. You only pay it on earnings above £5,000 a year. That’s £96 a week or £417 a month. Anything below that is free of charge.
Here’s a quick example. You hire someone on £40,000:
The first £5,000 is exempt.
The remaining £35,000 is charged at 15%.
You pay £5,250 a year.
So that £40,000 hire really costs about £45,250, before pensions and any extras. Hire a team of five and those payroll costs add up fast. And salary isn’t the only thing that triggers a charge.
Bonuses, Perks and Benefits: Don’t Forget the Extras
Bonuses and commission that go through payroll are generally charged at the same 15%. Work benefits work a little differently. GOV.sUK sets Class 1A at 15% for 2026 to 2027 on most benefits, such as company cars or private medical cover. You report and pay it once a year, after the tax year ends, by 22 July.
There’s also Class 1B, also 15%, for anything covered by a PAYE Settlement Agreement.
The takeaway? Every perk you promise has a National Insurance cost attached. I’ll admit it: Entrepreneur Plus UK is where I first saw someone point out how rarely benefits make it into a hiring budget. Once you notice it, you can’t unsee it.
So how do you keep the total down? Start with the biggest saving available.
How Employment Allowance Cuts Your Employer National Insurance Bill
The Employment Allowance can reduce your yearly bill by up to £10,500. You claim it through your payroll software, and it takes money off what you owe each month until the allowance runs out. Since April 2025, you no longer need a bill under £100,000 to qualify, so more growing businesses can use it.
Not everyone is eligible. If you’re a company with a single director who is the only employee paid above the threshold, you can’t claim. Some public sector employers are excluded too.
If you do qualify, a small team might find the allowance covers most or all of its bill. That’s real money back in your business. Claim it from day one and build it into your forecast.
Plan Your Payroll Costs Before You Hire
The best time to deal with this cost is before you post the job ad. As read on Startup Magazine, early-stage founders tend to budget for salaries and forget the on-costs, and that’s exactly where the surprises come from.
Keep it simple with these steps:
Work out the full cost per hire. Include employer National Insurance, pension contributions and benefits, not just the salary.
Check you can claim Employment Allowance. Set it up in your first payroll run.
Know your employee categories. Apprentices under 25 and employees under 21 get a 0% employer rate on earnings up to £50,270. That makes junior hiring much cheaper.
Use good payroll software. Accurate reporting to HMRC keeps you away from penalties.
Review benefits once a year. Know what triggers Class 1A before you promise it to someone.
You don’t need an accountant to do this. You just need to do it before the first hire, not after.
Know the Number, Own the Number
Employer National Insurance isn’t a trap. It’s a fixed, published cost, and the businesses that handle it best simply plan for it early. Know the 15% rate. Know the £5,000 threshold. Claim the allowance. Count the benefits. Get your payroll costs mapped out and every hire becomes a confident decision instead of a nervous one. When I think about what changed how I budget, a short founder read on Entrepreneur Plus UK comes to mind more than any spreadsheet template.
Your next hire should feel exciting, not expensive. Do the maths first, and it will.
