There is a point in most sole trader businesses where the work stops being limited by demand and starts being limited by you. You are turning jobs down, quoting six weeks out, and doing the paperwork at nine at night. The obvious answer is to take somebody on, and the reason most people put it off for another year is that they have no idea what it really costs.

Two things about that. First, you can employ people and remain a sole trader — you do not have to form a limited company to have staff, and thousands of trades businesses run for decades with two or three employees and no company at all. Second, the true cost is not the salary, and it is not the salary plus National Insurance either. This is the whole number, at the 2026/27 rates, and the things that legally have to be in place before the first payslip.

The rates you are working to in 2026/27

Four sets of figures drive everything below.

  • National Minimum and Living Wage, from 1 April 2026: £12.71 an hour for workers aged 21 and over, £10.85 for 18 to 20, £8.00 for 16 to 17, and £8.00 for apprentices in their first year or under 19.
  • Employer's National Insurance: 15% on everything an employee earns above the secondary threshold of £5,000 a year. That threshold is fixed at £5,000 until 5 April 2028.
  • Employment Allowance: £10,500 for the year, set against your employer's National Insurance bill. There is no longer any restriction based on your previous year's National Insurance liability.
  • Workplace pension: you must automatically enrol anyone aged 22 to state pension age earning over £10,000 a year. Minimum contributions are 8% of qualifying earnings, of which at least 3% must come from you. Qualifying earnings are the slice between £6,240 and £50,270.

A worked example

The figures below are illustrative, but the rates and rules are the real 2026/27 ones.

Jamie is a self-employed electrician. He takes on an improver, aged 24, working 37.5 hours a week on a salary of £26,000.

First, the minimum wage check

37.5 hours × 52 weeks = 1,950 contracted hours. £26,000 ÷ 1,950 = £13.33 an hour, comfortably above the £12.71 minimum. That check matters more than it looks: minimum wage is tested on hours actually worked, so paid overtime that is not paid for, or a salaried worker regularly doing 45 hours, can drag an apparently safe rate under the line.

Then the additions

  • Employer's National Insurance: (£26,000 − £5,000) × 15% = £3,150. The Employment Allowance covers all of it, so Jamie pays £0.
  • Employer pension: (£26,000 − £6,240) × 3% = £592.80. The employee contributes 5% of the same band, £988, from their own pay.
  • Employers' liability insurance: around £180 a year for a one-employee electrical business.
  • Payroll: around £180 a year for software or a bureau running one payslip a month.

Total: £26,952.80.

Now the number that actually matters

That cost does not buy 1,950 hours of work. Statutory holiday is 5.6 weeks, which for a five-day week is 28 days including bank holidays — 210 hours. So the money buys about 1,740 productive hours, before any sickness, training or travel between jobs.

£26,952.80 ÷ 1,740 = £15.49 an hour. That is the figure to put into a quote, not the £13.33 on the contract.

The gap between a headline hourly rate and the real cost per productive hour One employee on £26,000. Three different hourly numbers. Illustrative figures from the worked example. 2026/27 rates. £13.33 Salary ÷ contracted hours £13.82 Full cost ÷ contracted hours £15.49 Full cost ÷ productive hours 28 days of statutory holiday removes 210 hours a year from what the money buys. Quote off £13.33 and you are working a full day a fortnight for nothing.

The Employment Allowance runs out

Jamie pays no employer's National Insurance at all on one employee, and that stays true for a while. The allowance covers £10,500 of employer's National Insurance, which at 15% is the tax on about £70,000 of pay above the £5,000 threshold. On staff earning £26,000 each, it absorbs the first three comfortably and runs out partway through the fourth. Budget for real employer's National Insurance from the fourth hire, not the first.

Sick pay changed on 6 April 2026

This is the change most first-time employers have not caught up with, and it is the one that alters how a small team feels in practice.

Until this April, Statutory Sick Pay started on the fourth day of absence and was only available to employees earning at or above the lower earnings limit. Both of those conditions have gone. From 6 April 2026:

  • SSP is payable from the first full day of sickness absence. There are no waiting days.
  • There is no lower earnings limit. Every eligible employee qualifies regardless of what they earn.
  • The amount is the lower of £123.25 a week or 80% of average weekly earnings.

Two practical consequences. For Jamie's improver on £500 a week, 80% would be £400, so the flat £123.25 applies — but it now applies from day one, so a three-day absence costs Jamie about £74 where last year it cost nothing. And for a part-timer earning £100 a week, 80% is £80, which is what they now receive; a year ago they would have got nothing at all.

You cannot reclaim Statutory Sick Pay from HMRC. Other statutory payments are different — maternity, paternity, adoption and shared parental pay can be recovered, and a small employer paying £45,000 or less in Class 1 National Insurance recovers 100% plus 3% compensation. SSP is the exception, and it is a straight cost.

Six things that must be in place before the first payday

  1. Register as an employer with HMRC. Do it before the first payday. You cannot run a payroll without a PAYE reference and it can take up to 15 working days to arrive, so a week's notice is not enough. Registration can be done up to two months before you start paying anyone.
  2. Check their right to work in the UK before they start, and keep a dated copy of the evidence. Doing the check properly gives you a statutory excuse against a civil penalty. Getting it wrong is expensive: the starting point is £45,000 per illegal worker for a first breach and £60,000 for a repeat breach.
  3. Buy employers' liability insurance. It is compulsory from the day you employ anyone, with a minimum of £5 million of cover, and you must display the certificate where employees can read it. The fine for trading without it runs to £2,500 for each day you are uninsured, and a further £1,000 for not displaying the certificate.
  4. Give them a written statement of employment particulars on or before day one. Pay, hours, holiday, place of work, notice, sick pay arrangements and probation. This is a day-one right, not something to sort out in the first month.
  5. Have a pension scheme ready. Automatic enrolment duties start on the employee's first day. You must assess them, enrol anyone who qualifies, and file a declaration of compliance with The Pensions Regulator within five months of your duties start date — a filing that catches out a lot of first-time employers who did everything else right.
  6. Get payroll software that reports in real time. A Full Payment Submission has to reach HMRC on or before the day you pay someone. Late submissions attract penalties, and "I paid them in cash on Friday and did the payslip on Monday" is a late submission.

What this changes about your own tax

Wages, employer's National Insurance and employer pension contributions are all allowable business expenses, so they reduce the profit you pay income tax and Class 4 National Insurance on. On the illustrative figures above, £26,952.80 of cost at a 20% income tax rate plus 6% Class 4 saves roughly £7,000 of tax — which is real, but it is a discount on a cost, not a reason to hire. Our allowable expenses guide covers where staff costs sit alongside everything else, and the National Insurance guide explains how your own Class 4 interacts.

One thing that does not change: employing someone does not affect your VAT position, and it does not push you towards a limited company on its own. The structure comparison is driven by profit level and risk, not headcount.

What to do this week

  1. Work out your own cost per productive hour on the numbers above — salary, plus 15% National Insurance above £5,000 if your Employment Allowance is used up, plus 3% pension on qualifying earnings, plus insurance and payroll — then divide by contracted hours less 210.
  2. Compare that figure with what you currently charge out. If the gap is under about 40%, the hire loses you money once you allow for supervision and non-chargeable time.
  3. Register as an employer with HMRC now if you expect to hire within two months. The reference takes longer to arrive than people expect.
  4. Get an employers' liability quote before you offer anyone a job, so the number is in your budget rather than a surprise in week one.
  5. Decide the pension scheme before you advertise. Setting one up under time pressure in someone's first week is how declarations get missed.
  6. Write down your sick pay position now that SSP starts on day one. Two or three short absences a year is a cost worth having modelled rather than discovered.

Where we help

We set clients up as employers properly: PAYE registration, payroll run on time every month with real-time submissions HMRC accepts, auto-enrolment assessed and the declaration of compliance filed, and the employer's National Insurance and Employment Allowance position modelled before you commit to a salary rather than after. We also tell you honestly when the numbers say a subcontractor is the better answer this year. Fixed monthly fees from £19 + VAT a month, with payroll priced per payslip. Get started.