Growing your business can be both exhilarating and terrifying. Bringing on new employees means you’re expanding, taking on bigger opportunities, and building something great—but it also means your payroll costs start stacking up fast.
It’s not just about salaries. The true cost of employing someone includes National Insurance, pensions, recruitment fees, benefits, and even the electricity to power their computer.
These expenses add up quicker than you might expect, and if you’re not prepared, they can put serious pressure on your cash flow.
Let’s break down some of your direct and indirect payroll costs. This will help you understand exactly what you’re paying for—and why investing in the right people is always worth it.
Your direct payroll costs
Direct payroll costs refer to the wages, salaries, and benefits paid to employees who are directly involved in producing goods or providing services.
On top of their wages, direct payroll costs also include things like National Insurance contributions and pension contributions that the employer has to cover. It’s all the payroll expenses that can be directly tied to the actual work being done to generate revenue
Let’s look at some of the biggest direct payroll costs.
Your employees’ salaries
Salaries are one of the biggest and most obvious payroll costs because they’re the direct payment you give to employees for their work.
But let’s break it down with a real-world example:
Imagine you own a small café in London. You hire a full-time barista who’s 22 years old, so you must pay them at least the National Living Wage (which is £11.44 per hour, since 1 April 2024).
If they work 37.5 hours a week, over a full year, their gross salary would be:
£11.44 × 37.5 × 52 = £22,308
Their monthly salary would be:
£22,308 ÷ 12 = £1,859
Now, imagine you want to attract more experienced staff or retain your best employees. You might offer £12.50 per hour instead.
That increases your payroll cost to:
£12.50 × 37.5 × 52 = £24,375 per year.
Their monthly salary would be:
£24,375 ÷ 12 = £2,031.25
That’s why salaries are such a huge part of your business expenses—you can’t run your café without staff, but paying them well enough to keep them happy means balancing payroll costs carefully.
Employer National Insurance
Employer National Insurance contributions (NICs) are another major payroll cost that you have to factor in.
Class 1 employer NICs are additional contributions you must pay on top of your employees’ salary.
Let’s see what that looks like in practice:
Imagine you run a bakery, and you hire a full-time baker on the National Living Wage. Their salary, as we worked out earlier, is £22,308 per year (based on working 37.5 hours a week). But your cost as an employer doesn’t stop there.
Since this employee falls under Class 1 NIC, you must pay an extra 13.8% on earnings above £9,100 per year. So, let’s do the maths:
- Their taxable earnings for Class 1 NIC: £22,308 – £9,100 = £13,208
- Employer NIC: 13.8% of £13,208 = £1,822
That’s an extra £1,822 per year that you must budget for on top of their salary.
Now, here’s where it gets tricky—from April 2025, Class 1 NIC rates will increase to 15%, and the earnings threshold will drop to £5,000. That means:
- Taxable earnings: £22,308 – £5,000 = £17,308
- Employer NIC: 15% of £17,308 = £2,596.20
So, from April 2025, you’ll be paying nearly £1,000 more per employee in Class 1 NIC.
Workplace pension contributions
Workplace pension contributions are another important payroll cost to consider.
As per the Pensions Act 2008, you must help your employees save for retirement. While you can choose to contribute more, the minimum employer contribution is 3% on earnings above a set threshold (see below).
Say you own a small independent shop, and you hire a full-time retail assistant earning the National Living Wage. That’s their salary, but you also have to contribute to their workplace pension.
Here’s how it’s worked out:
- The Lower Earnings Threshold is £6,240, meaning only earnings above this are considered.
- Taxable earnings for the pension: £22,308 – £6,240 = £16,068
- Employer pension contribution: 3% of £16,068 = £482
So, on top of their salary and National Insurance, you must also pay at least £482 per year into their pension.
From April 2025 (when wages and thresholds change), this cost will rise further. Since the National Living Wage is increasing, the taxable amount for pensions will also go up, meaning you’ll need to contribute more.
While £482 might not seem like much on its own, when you add it to salaries and National Insurance, it all stacks up. With just one new employee, you’re looking at a total minimum cost of £24,612 per year—and that’s before considering holiday pay, statutory sick pay (SSP), or any extra employee benefits you might offer (but more on employee benefits later).
Employee bonuses
Bonuses are a great way to reward your employees for their hard work, but they’re also a direct payroll cost—and can be quite expensive.
Let’s say you run a busy restaurant, and your head chef has done an incredible job over the holiday season, keeping everything running smoothly and boosting customer satisfaction. To show your appreciation, you decide to give them a £1,000 performance bonus.
But here’s the thing—bonuses aren’t just a straight £1,000 cost to you. You also have to pay NICs on that bonus, just like you do on salaries.
So, the real cost of the bonus to you as an employer is:
£1,000 × 13.8% = £138
£1,000 + £138 = £1,138
And from April 2025, that cost would rise to £1,150.
Your indirect payroll costs
Office space and utilities
Having employees isn’t just about paying salaries—you also need to provide them with the tools and environment to do their job, and that comes with indirect payroll costs like office space and utilities.
These are expenses that don’t go directly into an employee’s pocket but are still essential costs of employing them.
Let’s say you run a small marketing agency, and you’ve just hired a new full-time graphic designer. They’ll need:
- A desk and chair to work comfortably (£500 one-off cost).
- A computer with design software (£1,500 one-off cost, plus an annual software subscription of £600).
- Access to printing, internet, and office supplies.
On top of that, simply having another person in the office means:
- Higher electricity bills (extra lighting, charging devices, running the computer all day).
- Increased water usage.
Individually, these costs might seem small, but they add up over time. You might not notice an extra person using a bit more electricity. But when you scale up and have a whole team, your utility bills could be significantly higher than when you were working alone (or with a small number of colleagues).
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Employers' liability insurance
Employers’ liability insurance is one of those hidden but essential costs of running a business. You might not think about it every day, but it’s legally required, and it protects you if something goes wrong.
Imagine you own a small construction company and hire a couple of workers. One day, one of them trips over some equipment on-site and injures their back. If they decide to claim compensation for their injury, you could be looking at thousands of pounds in medical costs, lost wages, and legal fees.
That’s where employers’ liability insurance comes in—it covers these costs so your business doesn’t have to pay out of pocket. Without it, a single workplace injury claim could cripple your finances.
Even if you run a low-risk office job, accidents can still happen—an employee could slip on a wet floor or develop repetitive strain injury from poor desk setup. You might never need to make a claim, but just having employees means you must have the insurance in place.
Hiring new employees
Hiring a new employee isn’t just about paying their salary once they start—it’s a costly process before they even set foot in your business.
Recruitment is one of those indirect payroll costs that people don’t always consider, but it can seriously add up.
Let’s say you own a growing tech startup, and you need to hire a software developer. You decide to use a recruitment agency to find the right person because you don’t have the time or expertise to sift through hundreds of applications.
Since recruiters typically charge 20-30% of the employee’s salary, and you’re offering £35,000 per year, you’ll be paying them anywhere from £7,000 to £10,500 just to fill the role. That’s a huge upfront investment before you’ve even started paying the employee’s wages.
If you decide to handle hiring yourself, it’s still expensive:
- You and your managers spend hours writing job descriptions, screening CVs, and conducting interviews—time you could be spending on actual work.
- You may pay for job ads on premium sites to get better visibility.
- If hiring takes weeks or months, that’s lost productivity from being short-staffed.
What about employee benefits?
Employee benefits might not be as obvious as salaries, but they’re a big part of your payroll costs—and an essential investment in keeping your team happy and loyal.
Imagine you run a small marketing agency, and you’ve worked hard to build a talented team. You know that keeping them happy means offering more than just a payslip, so you decide to introduce some attractive benefits:
- Private healthcare: you offer dental and optical insurance, costing you around £500 per employee per year.
- Larger pensions: instead of the minimum 3%, you contribute 5%, adding a few extra hundred pounds per employee annually.
- Extra holiday days: you add five extra paid days off per year (which effectively costs you their salary for an extra week without work).
Let’s say one of your best employees, Laura, was thinking about leaving because another company offered a slightly higher salary. But because she values the flexible hours and healthcare benefits you provide, she decides to stay.
In the long run, the £500 a year in healthcare is far cheaper than the £4,000+ it would cost you to replace her.
So, while benefits increase your average payroll costs, they also reduce your hiring expenses and improve productivity. In short, they’re an investment, not just an expense—because keeping great employees is always cheaper than replacing them!
How to reduce your payroll costs
Minimise employee turnover
High employee turnover is expensive—not just because of the recruitment costs, but because of the time you spend onboarding and training your employees.
Instead of constantly replacing staff, focus on keeping the great employees you already have. Offer growth opportunities, flexible work arrangements, and a positive work culture so they feel valued and motivated to stay.
When people see a future at your company, they’re less likely to leave for a small pay bump elsewhere. And the longer they stay, the more skilled and efficient they become—saving you money on hiring, training, and the disruptions that come with frequent turnover.
Automate routine tasks
One of the easiest ways to cut payroll costs per employee—without overworking your team—is by automating routine tasks.
Think about all the repetitive, time-consuming work that eats up time in the day: data entry, scheduling, invoice processing, finance reporting. The list goes on and on.
By using automation tools and software (such as Capture Expense’s AI reporting tool), you free up your employees to focus on more valuable work, reducing the need for extra hires.
Plus, automation minimises human error and speeds things up, meaning tasks get done faster and more accurately. The result? A more efficient team, lower payroll costs, and happier employees.
Use a payroll outsourcing service
Payroll outsourcing is a smart way to reduce payroll costs while saving yourself a ton of time and stress.
Instead of juggling payroll processing, tax compliance, and employee payments in-house, you hand it over to experts (like Cintra) who do it all for you.
Sure, there’s a service fee for payroll outsourcing, but when you compare that to the time your team spends on payroll—and the risk of costly mistakes—it’s usually a huge money-saver.
We know it’s a big commitment, and it’s hard to imagine what payroll outsourcing looks like in practice. To help you make an informed decision, we’ve outlined exactly how payroll outsourcing works.
Are you looking to reduce your payroll costs?
Our payroll solutions are flexible and fully customisable, so we can build a service that works for you. Book a demo with one of our payroll experts today.
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