What are employment on-costs?
Employment on-costs (also called salary on-costs or employer on-costs) are all the costs an employer pays on top of an employee's gross salary. The term is used in payroll, HR and financial planning to capture the true cost of employment beyond the headline pay figure. For budget purposes, UK employers typically model on-costs as 15–20% above gross salary in mandatory statutory costs alone.
In 2026/27, the two main statutory on-costs for most employers are: employer National Insurance at 15% on earnings above £5,000, and the employer auto-enrolment pension contribution at a minimum of 3% on qualifying earnings between £6,240 and £50,270. These are required by law — they are not optional and they are paid directly by the employer in addition to gross salary.
The word 'on-costs' is widely used in UK employment contracts, HR budgeting and job-costing contexts. If a business charges a client for a staff member's time, it often adds an on-cost uplift to the day rate or hourly rate to recover the employer's NI and pension liability above the gross pay.
The main components of employment on-costs
Employer National Insurance is the largest on-cost for most UK employers. For 2026/27, the rate is 15% on employee earnings above the secondary threshold of £5,000. On a £35,000 salary, this is (£35,000 − £5,000) × 15% = £4,500 per year. There is no upper earnings cap — NI continues at 15% on all earnings above £5,000 regardless of salary level.
Employer pension contributions under auto-enrolment are the second statutory on-cost. The minimum employer contribution is 3% of qualifying earnings — the portion of salary between £6,240 and £50,270. On a £35,000 salary, qualifying earnings are £28,760 and the minimum employer pension is approximately £863 per year. Employers may contribute more than the minimum if their scheme rules require it or they choose to be more generous.
Holiday pay is included in the gross salary for salaried employees — it is not an additional on-cost for full-time staff on annual salaries. However, for zero-hours workers, casual staff and workers on irregular hours, holiday pay is calculated as 12.07% of hours worked (or 5.6 weeks' entitlement spread over the year) and is a genuine additional on-cost above the hourly rate. This is an important distinction when budgeting for flexible or variable-hours workers.
Operational on-costs vary by role and employer. Common examples include: IT equipment (laptop, software licences) typically amortised at £600–£1,500 per year; desk and workspace cost for office-based roles (£2,000–£5,000 per year for managed office space); HR and payroll administration time; training and development costs; and any role-specific expenses such as work clothing, tools, vehicle use or professional subscriptions. These vary widely and are not standardised, but a mid-point assumption of £2,000–£3,000 per year is reasonable for a typical office or office-hybrid role.
On-cost worked example at £35,000
Take a full-time employee on £35,000 per year. Employer NI: (£35,000 − £5,000) × 15% = £4,500. Employer pension: 3% of (£35,000 − £6,240) = 3% of £28,760 = £863. Total statutory on-costs: £5,363. Total statutory employment cost: £40,363 per year (£3,364/month). Add an overhead assumption of £3,000 (equipment, software, management time) and the total rises to approximately £43,363 — 24% above the gross salary.
For employers claiming Employment Allowance, the NI component can be offset by up to £10,500 per year. A business with three employees at £35,000 each generates approximately £13,500 employer NI. Employment Allowance covers £10,500, leaving a net NI bill of £3,000. This significantly reduces the effective on-cost rate for smaller businesses — in this example, from 15% to 2.9% of total payroll.
The on-cost percentage tends to be higher for lower-paid roles as a proportion of salary. A part-time worker on £12,000 (just above the personal allowance) generates approximately £1,050 employer NI and £174 minimum pension — on-costs of about 10.2% of salary. At the National Living Wage (approximately £23,810 for a 37.5-hour week), on-costs are approximately £3,354 — 14.1%. At £70,000, on-costs are approximately £11,411 — 16.3%. The rate is broadly stable at higher salaries because there is no NI cap.
On-costs vs total cost to employer
On-costs are the costs above gross salary. Total cost to employer is the sum of gross salary plus all on-costs. These terms are sometimes used interchangeably but are technically different: if a role has a £30,000 salary and £4,464 on-costs, the on-cost is £4,464 and the total employer cost is £34,464.
When creating a business case for a hire, use total employer cost (not gross salary) as the financial commitment. For job costing and client billing, use on-cost as the uplift on the raw pay rate. Both terms are in common use and the distinction matters in how costs are allocated in payroll, finance and HR systems.
Use the employer cost calculator to compute exact statutory on-costs for any UK salary in 2026/27, with or without Employment Allowance applied and at any employer pension rate.