Employee vs Subcontractor 2026/27

Employer National Insurance is a payroll tax paid by employers — not employees — directly to HMRC on top of the gross salary. For 2026/27, employers pay 15% on any employee earnings above £5,000 per year. So for an employee earning £30,000, the calculation is: (£30,000 − £5,000) × 15% = £3,750 in Employer NI per year. This is a significant hidden cost that sits entirely on top of the salary and is separate from the employee's own National Insurance deduction. Many businesses are caught out by this when budgeting for their first hire.

The Employment Allowance is a relief that allows eligible employers to reduce their annual Employer NI bill by up to £10,500 per tax year. It is claimed through payroll software and reduces your liability until the allowance is used up. Most small and medium businesses are eligible, but you cannot claim if your Employer NI bill in the previous tax year exceeded £100,000, if you are a sole director company with no other employees, or if you employ someone purely for domestic or personal work. If you are eligible, it can make a significant difference to the true cost of employment, particularly at lower salary levels.

Auto-Enrolment is the legal obligation for employers to automatically enrol eligible workers into a workplace pension and make minimum contributions. Employees must be enrolled if they are aged 22 to State Pension age and earn more than £10,000 per year. The minimum employer contribution is 3% of qualifying earnings — calculated on earnings between £6,240 and £50,270 per year. For an employee on £30,000, that works out to approximately £713 per year in employer pension contributions. This is a mandatory cost on top of salary and Employer NI that must be factored into your true employment budget from day one.

On a direct cost comparison, a subcontractor removes the burden of Employer NI, pension contributions, holiday pay, and sick pay entitlements. However, subcontractors typically charge a higher rate than an equivalent employee's gross salary, because they are covering their own tax and National Insurance obligations. The real question is not whether a subcontractor is cheaper in principle, but whether their total fee is higher or lower than the employee's all-in cost. This calculator answers that question precisely. IR35 status is also important to consider — if HMRC deems a subcontractor to be a disguised employee under IR35 rules, the tax advantages of the arrangement can be removed entirely and significant penalties can follow.

Both employment costs and subcontractor fees are allowable business expenses, which means they reduce your taxable profit before Corporation Tax is applied. At the small company rate of 19%, every £1 of business expenditure effectively costs only £0.81 in real terms — because the remaining £0.19 is tax you no longer pay. This calculator applies that relief to both options to show you the genuine net cost to your business, rather than the raw headline figures. It means that an employee's total employer cost of £35,000 and a subcontractor fee of £30,000 are actually much closer in real terms than they first appear once Corp Tax relief is factored in.