What an employee actually costs

Salary is roughly two thirds of what an employee costs. Budgeting on salary alone is how a hire becomes unaffordable in month three.

Hiring is usually the largest financial commitment a small business makes, and the number people plan around is the one on the offer letter.

Step-by-step

1. Enter the salary.
2. Add employer contributions and statutory costs.
3. Add the rest — equipment, software, space, recruitment.
4. Read the true annual cost, and what it is per productive hour.

What sits on top of salary

• Employer national insurance or payroll taxes.
• Pension contributions.
• Equipment — laptop, phone, desk, tools.
• Software licences, per seat and recurring.
• Space, if they need somewhere to sit.
• Recruitment — advertising or an agency fee, often a substantial percentage of first-year salary.
• Training and onboarding, including the time of whoever does it.

Together these commonly add 30–50% to salary, and more for a role requiring specialist equipment.

Productive hours, not paid hours

You pay for around 260 days and receive perhaps 200 after holiday, illness, training and the ordinary friction of a working week. The cost per productive hour is therefore considerably higher than salary divided by 2,080.

That figure is the one to use when deciding whether to hire, outsource, or automate.

Can the business afford it?

The test is not whether you can pay this month. It is whether you can pay through a quiet quarter, since employment costs continue while revenue does not. Work out how many months of the full cost you could cover if sales fell by a third.

Frequently asked questions

How much more than salary does an employee cost?

Commonly 30–50% on top, from employer contributions, pension, equipment, software, space and recruitment. Specialist roles can cost more.

What is the cost per productive hour?

Total annual cost divided by hours actually worked, which is well below hours paid once holiday, illness and training are removed. That is the figure to use when comparing hiring against outsourcing.

How do I know if I can afford a hire?

Test whether you could sustain the full cost through a quiet period with revenue down a third. Employment costs continue when sales do not.