How Much Does It Really Cost to Employ Someone in 2026/27? The True Cost Guide for London Small Businesses

A practical guide for London small businesses covering the real employment cost in 2026/27, with worked examples at three salary levels, Employment Allowance claim steps, and every payroll change that took effect in April 2026.

Most small business owners know their headline wage bill. Very few know their true employment cost — and the gap between the two has never been wider than in 2026/27.

Between April 2025 and April 2026, a higher employer National Insurance rate, a lower secondary threshold, rising minimum wages, and new day-one Statutory Sick Pay rights have fundamentally changed what it costs to put someone on your payroll. This guide breaks down the real numbers with worked examples, so you know exactly what you are committing to before you post your next job advert.

What Changed in April 2025 and April 2026

The employer NI rate increased from 13.8% to 15% in April 2025. That change is now fully embedded in the 2026/27 payroll year. Alongside the rate change, the secondary threshold — the point at which employer NI starts — dropped from £9,100 to £5,000 per year. You now start paying 15% NI on a much larger portion of every employee’s earnings, including part-time workers who previously fell below the threshold entirely.

From 1 April 2026, the National Living Wage rose to £12.71 per hour for workers aged 21 and over. From 6 April 2026, Statutory Sick Pay became a day-one right for all employees regardless of earnings — the three-day waiting period is gone, and the Lower Earnings Limit no longer restricts SSP eligibility.

The 2026/27 Rates You Need to Know

Item	Rate / Amount
Employer NI rate	15%
Secondary threshold (where employer NI starts)	£5,000 per year (£417/month)
Employment Allowance	£10,500 per year — £100,000 cap removed
National Living Wage (age 21+)	£12.71 per hour from 1 April 2026
NMW age 18–20	£10.85 per hour
NMW age 16–17 and apprentices	£8.00 per hour
Minimum employer pension contribution	3% of qualifying earnings above £6,240
Statutory Sick Pay (weekly rate)	£116.75 per week — day-one right

The True Cost: Worked Examples

When employers think about salary, they think about gross pay. The actual cost is gross pay plus employer NI plus employer pension contribution. Here are three examples at different salary levels.

Example 1: Full-Time National Living Wage Employee (37.5 hrs/week)

Gross annual pay (37.5 hrs × £12.71 × 52)	£24,785
Employer NI: (£24,785 – £5,000) × 15%	£2,968
Employer pension — 3% above £6,240	£556
Total annual employment cost	£28,309
Same employee 2024/25 — for comparison	~£25,435
Annual increase	~£2,874 per employee

Example 2: Office / Admin Employee on £28,000

Gross annual pay	£28,000
Employer NI: (£28,000 – £5,000) × 15%	£3,450
Employer pension — 3% above £6,240	£653
Total annual employment cost	£32,103

Example 3: Senior Employee / Manager on £45,000

Gross annual pay	£45,000
Employer NI: (£45,000 – £5,000) × 15%	£6,000
Employer pension — 3% above £6,240	£1,163
Total annual employment cost	£52,163

These figures exclude recruitment costs (agency fees typically 10–15% of first-year salary), employer liability insurance, training, and benefits in kind. They are the absolute floor of what an employee costs.

The Employment Allowance — and Why You Must Claim It

The Employment Allowance lets eligible employers reduce their annual employer NI bill by up to £10,500. The previous £100,000 eligibility cap was removed for 2025/26 and continues into 2026/27 — meaning the majority of small and medium businesses now qualify.

For a business with five employees earning an average of £30,000 each, the employer NI liability before the allowance is approximately £18,750. The £10,500 Employment Allowance reduces that to £8,250 — a material difference in monthly cash flow.

If you are running payroll yourself or through a bookkeeper and are not certain the claim has been submitted for 2026/27, check before your next payroll run. Our payroll outsourcing team activates this on the first RTI submission of every new tax year as standard.

The Six April 2026 Payroll Changes That Affect Your Business

1. Day-One Statutory Sick Pay

From 6 April 2026, any employee who falls sick from their first day of employment qualifies for Statutory Sick Pay at £116.75 per week. The three-day waiting period is abolished. The Lower Earnings Limit no longer restricts eligibility. For businesses with high staff turnover or seasonal workers, budget for increased sick pay exposure from the start of every new hire’s employment.

2. Payrolling of Benefits — P11D Replaced

Payrolling of benefits in kind became mandatory for most employers from April 2026. Benefits — company cars, private medical insurance, gym memberships — that were previously reported on a year-end P11D must now be reported in real-time through payroll as they are provided. If you are still running benefits through P11D, this needs correcting immediately to avoid compliance issues with HMRC.

3. Student Loan Plan 5 Deductions

Plan 5 deductions apply from April 2026 for graduates who started courses after August 2023. The repayment threshold is £25,000 at a 9% rate. If you employ recent graduates, your payroll software needs to handle Plan 5 deductions correctly — alongside the existing Plan 1, Plan 2, Plan 4, and Postgraduate Loan plans.

4. Minimum Wage Rates From 1 April 2026

The National Minimum Wage rates changed on 1 April 2026 — five days before the PAYE year changed on 6 April. For weekly payroll operators, the wage change and tax-year change fall in different payroll periods. Review your rota, salary sacrifice arrangements, and deductions now to ensure no worker is inadvertently pushed below the new minimum.

5. Tax-Free Reimbursements Expanded

From April 2026, employers can reimburse staff for home working equipment, eye tests, and flu vaccinations completely free of Tax and National Insurance. If your business currently runs these through benefits in kind or as taxable income, review and restructure them to take advantage of the exemption.

6. Fair Work Agency — Stronger Enforcement Powers

The Fair Work Agency began operations in 2026 with significantly stronger enforcement powers. Penalties for National Minimum Wage underpayment can reach 200% of the underpaid amount. For payroll errors resulting in SSP being incorrectly withheld, you face both employee claims and HMRC penalties. Using exact hours in your RTI submissions — rather than estimated bands — is strongly recommended as your primary defence during any audit.

What Does Payroll Outsourcing Cost in London?

For many London small businesses, the complexity of 2026/27 payroll makes outsourcing a rational decision. The cost of managing payroll errors — penalties, employee claims, HMRC correspondence — far exceeds the cost of professional payroll management.

At Protax, our payroll outsourcing service handles RTI submissions, Employment Allowance claims, pension auto-enrolment reporting, P60 preparation, and payrolled benefits filings. We cover day-one SSP rules, minimum wage compliance, and all student loan plans as standard — on a fixed monthly fee with no hidden charges.

Our bookkeeping service integrates with payroll to keep your accounts and employer obligations aligned throughout the year. If you are also running your company accounts through us, payroll is typically included as part of a combined small business accounting package.

True Employment Cost Checklist for 2026/27

Before hiring or running your next payroll, confirm each of the following:

• Gross pay at or above the correct NMW/NLW rate for each employee’s age
• Employer NI calculated at 15% above the £5,000 secondary threshold
• Employment Allowance claimed via EPS on the first payroll run of the year
• Employer pension at minimum 3% of qualifying earnings above £6,240
• Payrolled benefits configured in payroll software — not reported on P11D
• SSP budgeted as a day-one entitlement with no waiting period
• Student loan deduction plans verified for all relevant employees
• NMW rates reviewed from 1 April 2026 (five days before the new tax year)

Frequently Asked Questions

When did the National Living Wage change in 2026?

The National Living Wage for workers aged 21 and over increased to £12.71 per hour from 1 April 2026 — not 6 April. This means the wage change and the new PAYE tax year (which starts 6 April) fall five days apart, which can affect weekly payroll calculations for the period straddling the two dates.

Do I have to pay employer NI on every employee?

You pay employer NI at 15% on earnings above the secondary threshold of £5,000 per year (£417 per month). Employees earning below this — typically very part-time workers — do not trigger employer NI. The Employment Allowance can offset up to £10,500 of your employer NI bill per year.

Has the Employment Allowance changed for 2026/27?

The Employment Allowance remains at £10,500 for 2026/27, the same level introduced in 2025/26. The key change from 2025/26 was the removal of the £100,000 eligibility cap, which now carries forward into 2026/27. You must re-claim the allowance through your payroll software at the start of each tax year — it does not roll over automatically.

What is day-one SSP and how does it affect my costs?

From 6 April 2026, all employees are entitled to Statutory Sick Pay from their first day of sickness, regardless of how long they have worked for you or how much they earn. The previous three-day waiting period has been abolished. You pay SSP at £116.75 per week for up to 28 weeks. Budget for this as a baseline sick pay cost for every employee from day one of their employment.

Can I still use salary sacrifice for pension contributions?

Yes. Salary sacrifice for pension contributions remains fully available in 2026/27 and saves both employer and employee NI on the sacrificed amount. Note that from April 2029, NI relief on salary sacrifice pensions will be capped (exact amount to be confirmed). This does not affect 2026/27 planning, but is worth factoring into any long-term pension commitments made now.