Adding 20% is wrong in both directions at once
Everybody uses the same rule of thumb, and it is not right at any salary.
It overstates what the law adds. Employer National Insurance at 15% above a £5,000 threshold, plus the 3% auto enrolment pension on qualifying earnings, comes to 14 to 16 per cent. Never twenty.
And it understates the real total. Equipment, software licences, employer's liability insurance, the recruitment cost of filling the seat, training and the space somebody sits in are all missing. On a normal office hire those together come to more than the National Insurance does.
Twenty per cent happens to land between the two errors, so nobody notices it is wrong. The tool separates them, because the two halves behave completely differently: one is fixed by statute and one is a set of decisions the business made.
The on-cost percentage goes up with salary, not down
This one is counterintuitive and worth a moment. The pension stops at £50,270 while the salary carries on, so you would expect the percentage to fall as pay rises. It does not, at first.
The £5,000 of National Insurance free pay dominates. It is a fifth of a £25,000 salary and a twentieth of a £100,000 one, so the relief shrinks in proportional terms faster than the pension cap helps:
- £25,000: 14.3%
- £50,270: 16.1%, the peak
- £100,000: 15.6%
- £200,000: 15.3%
The peak lands exactly at £50,270, where the pension contribution has maxed out and the National Insurance relief still counts for something. After that it declines slowly towards the bare 15% rate.
A day of work is not the salary over 260
This is the number most worth having, and almost nobody calculates it correctly.
A full time year is about 260 working days. Statutory leave takes 28 of them, including bank holidays. Average sickness takes several more. So the salary buys roughly 226 days of somebody actually being there.
Divide by 260 and the day rate is understated by about fifteen per cent before a single on-cost is added. Add the on-costs and the real figure is around 30% above what people reach for.
That matters wherever a day is being priced: quoting a client, working out whether a job pays, or comparing an employee against a contractor. A contractor day rate that looks expensive next to salary ÷ 260 often is not once the comparison is made properly, and the same arithmetic runs the other way for anybody deciding whether a piece of work is worth doing at all.
Spread recruitment over how long they stay
A £4,000 recruitment cost charged entirely to year one makes a new hire look far more expensive than somebody who has been there five years, which is true and also not very useful for a comparison.
Spreading it over expected tenure is the fairer view. And if expected tenure is one year, the cost of that is itself the finding, and it is a bigger number than most retention conversations start from. The turnover and stability tool is the other half of that question.
PAYE comes out of the salary, not on top of it
PAYE and employee National Insurance are not included, and that is not an omission. They come out of the salary rather than sitting on top of it, so they cost the employer nothing extra. Adding them would double count money already inside the salary figure, which is a common way for a cost-of-employment number to come out far too high.
Also outside: the apprenticeship levy, company cars and benefits in kind, and anything to do with whether the person is an employee at all rather than self employed, which changes every other answer on the page.
Common questions
Is it right to add 20% to a salary?
No, and it is wrong in both directions at once. The statutory on-cost, employer National Insurance plus the auto enrolment pension, is 14 to 16 per cent depending on the salary, so 20% overstates what the law adds. But it also understates the real total, because equipment, software, insurance, recruitment, training and space are all missing. Twenty per cent survives because it lands between two errors.
What is the employer National Insurance rate?
15% of earnings above the secondary threshold of £5,000 a year, for 2026/27. Below that there is none, which is why the on-cost percentage is lower on a small salary than a large one.
Why does the on-cost percentage go UP with salary?
Because the £5,000 of National Insurance free pay is a fifth of a small salary and a twentieth of a large one, so the relief shrinks in proportional terms faster than the pension band cap helps. The percentage peaks at £50,270, where the pension contribution is at its maximum, then declines slowly towards the bare 15% National Insurance rate.
What does a day of an employee cost?
Considerably more than the salary divided by 260. A full time year is about 260 working days, statutory leave takes 28 including bank holidays, and average sickness takes several more. So the salary buys roughly 226 days of somebody being there, and the real day rate is around 30% above the naive figure once on-costs are added.
Should I include recruitment cost?
Yes, spread over how long you expect them to stay. Charging it all to year one is the honest way to see a first-year cost, but it makes a new hire look expensive against somebody who has been there a while. If expected tenure really is one year, the cost of that is itself the finding.
Can I use the Employment Allowance on every employee?
No. It is one allowance of up to £10,500 for the whole business against its total National Insurance bill, not one per head. Applying it to a second hire double counts it. A company with a single director and no other employees cannot claim it at all.
Does this include PAYE and employee National Insurance?
No, deliberately. Those come out of the salary rather than sitting on top of it, so they cost the employer nothing extra. Including them would double count money that is already in the salary figure.