True Cost of Employee Calculator

How to use this calculator

1. Amortise recruitment over expected tenureA £4,000 agency fee is not a first-year cost. Spread across three years it is £1,333 a year — and a role with high turnover carries it far more often.
2. Include workspace even if remoteA remote worker still costs something: a desk allowance, equipment, or a share of a smaller office. Zero is rarely the right answer.
3. Be realistic about sicknessThe UK average is around five to seven days a year. Entering zero produces a cost per hour that will never be achieved.
4. Price against the productive hourThat is the figure that matters for charge-out rates, and it is substantially higher than the salary rate.

Salary is about three quarters of the cost

Budgets are almost always built on salary, because salary is the number in the offer letter. Everything else is real, recurring and largely invisible.

Employer National Insurance is the largest single addition for most roles. It is charged on pay above the secondary threshold with no upper limit, so it scales linearly — a pay rise costs the same percentage extra at every salary level.

Auto-enrolment pension is next. Three per cent of qualifying earnings is the statutory minimum, and many employers pay more, either from competition for staff or because a sacrifice arrangement passes the NI saving back.

Recruitment is where budgets tend to go wrong. An agency fee is commonly 15 to 20% of first-year salary, and it recurs every time the role turns over. Amortising it across expected tenure is the honest treatment, and it makes retention visible as a cost saving rather than a soft benefit.

A role with one-year average tenure carries three times the annual recruitment cost of one with three-year tenure. That single line often justifies more spending on retention than any engagement survey does.

Equipment, software licences and workspace are straightforward once you decide to count them. The mistake is treating them as fixed overhead that would exist anyway — at the margin, one more employee means one more laptop, one more licence and one more desk.

Training, insurance and benefits complete the picture.

Add it all up and the on-cost is typically 25 to 35% of salary. That is the number to use when budgeting a headcount increase, and it is why a £35,000 role is not a £35,000 decision.

What this deliberately excludes is management time, the cost of the vacancy while recruiting, and the productivity ramp of a new starter. All three are real, all three are hard to quantify, and all three push the true figure higher rather than lower.

Worked example: a £35,000 role

Employer National Insurance on £35,000 above a £5,000 threshold at 15% is £4,500.

Pension at 3% is £1,050.

Recruitment of £4,000 spread over three years is £1,333 a year. Equipment of £1,800 over three years is £600.

Software £600, workspace £2,400, training £500, insurance £400.

Total on-costs: £11,383. Total annual cost: £46,383.

So the on-cost is 32.5% of salary, and the salary is only 75.5% of what the role costs. That is £3,865 a month rather than the £2,917 the salary alone suggests.

Now the hourly figure, which is where it becomes useful for pricing.

A 37.5 hour week over 260 contracted days is 1,950 hours a year. Cost per contracted hour: £23.79.

But 28 days of holiday, 5 of sickness and 3 of training remove 36 days, leaving 224 days actually worked. That is 1,680 productive hours.

Cost per hour actually worked: £27.61.

The salary alone works out at £17.95 per contracted hour. So the true cost is 1.54 times the salary rate — a multiple worth remembering, because it is roughly stable across salary levels.

For anyone charging out time, the break-even day rate is £27.61 × 7.5 hours = £207. That is before any margin, before non-billable time, and before allowing for the hours that go on internal work rather than client work.

A services business billing 70% of available hours needs a charge-out rate of £207 ÷ 0.7 = £296 a day just to break even on that employee.

Now change one input. Cut expected tenure from three years to one, and the recruitment line goes from £1,333 to £4,000. Total cost rises to £49,050 and the productive hourly cost to £29.20 — a 5.8% increase from turnover alone.

That is the cost of losing people, expressed in a way a budget can act on.

On-cost by salary

Overheads assume recruitment at around 12% of salary amortised over three years, plus equipment, software, workspace, training and insurance scaled modestly with seniority. The on-cost percentage falls as salary rises because the fixed overheads dilute — but the absolute figure grows steadily. Enter your own numbers above; these are illustrative of the shape, not of any particular business.

Using this for pricing, budgeting and retention

For charge-out pricing, the productive hourly cost is the floor and nothing below it makes money. Add the utilisation rate — the proportion of available hours actually billed — then the margin, then any sales and delivery overhead not already counted.

A common error is to price from the salary rate and treat the difference as margin. That is not margin; it is the on-cost, and a business pricing that way loses money on every hour while believing it is profitable.

For budgeting a new hire, use the total figure rather than the salary. A hiring plan built on salaries alone understates the commitment by roughly a third, which is enough to turn an approved budget into an overspend.

For retention, the recruitment line makes the case quantitatively. Halving turnover halves the amortised recruitment cost, and on the worked example above that is worth £2,667 a year per role — more than most retention interventions cost.

Add the productivity ramp, which this calculator does not attempt to model. A new starter typically takes three to six months to reach full effectiveness in a skilled role, and that lost output is a real cost of turnover that dwarfs the agency fee in many cases.

For comparing employment against contracting, the total cost is the right basis. A contractor day rate that looks expensive against a salary often looks reasonable against the full employment cost — though a contractor carries no holiday, sickness, pension or notice period, and can be stopped, which has its own value.

The reverse is also true. Comparing a contractor's day rate against an employee's salary-derived day rate is not a like-for-like comparison, and it is the most common way contracting is made to look worse than it is.

On part-time and flexible roles: the fixed overheads do not halve when the hours do. Equipment, software licences, recruitment and much of the workspace cost are broadly the same for a part-time employee as a full-time one, so the cost per hour is higher. That is a genuine consideration, not an argument against part-time working, and it should be understood rather than discovered.

Finally, keep the assumptions visible. The value of this calculation is not the number it produces but the list of things it makes explicit. A business that has never written down what an employee costs beyond salary usually finds the exercise itself more useful than the total.

Assumptions and limitations

• Employer NI rates and thresholds change each April — check GOV.UK and override
• Uses a 260-day year and does not model part-time, shift or annualised hours patterns
• Excludes management time, vacancy cost and new-starter productivity ramp
• Assumes overheads scale with headcount rather than being fixed
• Does not model statutory payment recovery or Small Employers' Relief
• Pension uses a flat percentage of total pay rather than qualifying earnings bands
• Not financial advice — confirm figures with your accountant before budgeting

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