- Employer payroll on-costs = employer NI (15% above £5,000) + employer pension (minimum 3% on qualifying earnings).
- At £35,000: total payroll on-cost £5,363/year (15.3% above salary). At £50,000: £7,911/year (15.8%).
- Pension qualifying earnings are capped at £50,270 — above this, pension stays at ~£1,661/year while NI grows.
- Employer NI has no upper cap — it continues at 15% on all earnings above £5,000.
- Employment Allowance offsets up to £10,500 of employer NI for eligible businesses.
What employer payroll costs consist of in 2026/27
UK employer payroll costs have two mandatory statutory components: employer National Insurance contributions and employer pension contributions. Employer NI is 15% on employee earnings above the secondary threshold of £5,000 per year, with no upper limit. Employer pension under auto-enrolment is a minimum 3% of qualifying earnings between £6,240 and £50,270. For a typical full-time employee on £35,000, these statutory payroll on-costs add £5,363 per year — roughly 15.3% above gross salary.
Payroll costs are distinct from salary because they are invisible to the employee — the employer pays them directly to HMRC and the pension provider in addition to net wages. When employers budget for a new hire or model a salary increase, they need the gross salary plus all employer on-costs to arrive at the true budget impact. A 5% pay rise for an employee on £40,000 (from £40k to £42k) costs the employer not £2,000 but approximately £2,300 — the extra £300 comes from increased employer NI on the incremental £2,000.
Beyond statutory costs, payroll administration itself has a cost. Payroll software runs from free (FreeAgent, Basic PAYE Tools) to several thousand pounds per year for larger businesses using Sage Payroll, BrightPay or Xero. Outsourced payroll bureau services typically charge £5–£20 per employee per month depending on complexity and frequency. For a ten-person business, outsourced payroll costs roughly £600–£2,400 per year — a minor line item compared with NI and pension.
Payroll cost at common salary levels
NLW (£23,810/year): employer NI £2,822, pension £532. Employer payroll on-cost: £3,354/year (14.1% above salary). Monthly payroll cost above salary: £280. At £28,000: employer NI £3,450, pension £653. On-cost: £4,103 (14.7%). At £35,000: employer NI £4,500, pension £863. On-cost: £5,363 (15.3%). At £45,000: employer NI £6,000, pension £1,163. On-cost: £7,163 (15.9%). At £60,000: employer NI £8,250, pension £1,661 (cap applies). On-cost: £9,911 (16.5%).
Above £50,270 the qualifying earnings band for pension is capped, so employer pension stays at approximately £1,661 per year regardless of salary. Employer NI, however, has no cap and continues at 15% on all earnings above £5,000. At £100,000: employer NI £14,250. With pension capped at £1,661, total employer payroll on-cost is £15,911 per year — 15.9% above salary.
These calculations assume no Employment Allowance. For eligible employers, Employment Allowance offsets up to £10,500 of employer NI annually, significantly reducing the payroll cost of lower-salary hires. A business with ten employees averaging £28,000 generates approximately £34,500 in employer NI — allowance covers £10,500, reducing the effective payroll tax bill to £24,000. Model your allowance scenario using the employer cost calculator.
Employer payroll costs vs employee payroll deductions
It is important to distinguish employer payroll costs (what the business pays on top of gross salary) from employee payroll deductions (what is taken from the employee's gross pay). Employee deductions include employee NI at 8% between £12,570 and £50,270 (2% above), income tax at 20%/40%/45%, and employee pension contributions (5% minimum for auto-enrolment). These reduce take-home pay but do not affect the employer's direct cost.
The employer's total payroll cost = gross salary + employer NI + employer pension. The employee receives gross salary minus income tax minus employee NI minus employee pension. The employer pays gross salary plus employer NI plus employer pension. A £35,000 gross salary gives the employer a total payroll cost of approximately £40,363 per year but gives the employee a take-home of approximately £27,200 — the gap between the two figures (£13,163) represents employer on-costs and HMRC deductions combined.
For HR budget planning, procurement and finance teams typically work from employer cost rather than gross salary. Use the employer cost calculator to generate both figures simultaneously — gross salary, total employer cost, and the breakdown of NI and pension components — for any salary with any pension rate and overhead assumption. The monthly employer cost figure is the most useful number for monthly headcount budget reconciliation.