One of the most common conversations we have with founders goes something like: “we’ve budgeted for four hires next year, and the money’s there”. Then payroll runs for the first time and the number leaving the bank is nothing like the one in the plan.

The plan wasn’t careless. The salary in the offer letter is simply the smallest part of what a hire costs, and the rest of it doesn’t show up until someone has already started.

In this blog, we’ll explain what sits on top of a gross salary in the UK, how the Employment Allowance changes the picture as your team grows, and how to build a headcount plan that survives contact with payroll.

What actually leaves the bank for each employee

Gross salary is the base. On top of it:

Employer National Insurance, charged on earnings above a threshold. This is a cost to the business, not a deduction from the employee, and it’s the largest addition.

Employer pension contributions under auto-enrolment, a minimum of 3% of qualifying earnings.

Apprenticeship Levy, which only applies once your annual pay bill passes £3 million, so it’s not something most startups need to think about for a while.

Then the costs that don’t show up in payroll at all: recruitment fees, which for a senior technical hire routinely run to 20% of first-year salary, plus equipment, software seats per head, and employer’s liability insurance.

The working shorthand most founders end up using is that a hire costs roughly 20% to 25% more than the salary in payroll terms alone, before recruitment. If your model has five hires at £60,000, the payroll cost is closer to £360,000 than £300,000 – a gap roughly the size of another salary.

The Employment Allowance, and why it runs out

The Employment Allowance lets eligible employers reduce their annual employer National Insurance bill by a set amount. For a team of three or four, it can cover most of the liability, which is exactly why it distorts planning.

It’s an annual allowance, not a per-employee one. As the team grows, it’s consumed earlier in the year, and the monthly employer NI cost steps up partway through – often in the same year you’re hiring hardest. Founders who modelled the first year’s low effective cost and extended it forward get caught by this.

Worth knowing: companies where a single director is the only employee are generally not eligible, which catches a lot of very early startups.

A worked example

A startup plans four hires in the year: two engineers at £70,000, a salesperson at £55,000 and an operations hire at £40,000. Gross salary cost is £235,000, and that’s the number in the model.

Add roughly 15% employer NI on earnings above the threshold and 3% pension, and the payroll cost is around £275,000. Add recruitment at 15% on the two engineering roles and it’s £296,000.

That’s £61,000 more than the plan – about 26% – and in a business burning £90,000 a month it’s the difference between raising in month nine and raising in month eight. Nothing went wrong. The plan was just built on the wrong number.

When the money actually leaves

The cash timing is its own trap. Net pay goes out on your pay date. PAYE and employer National Insurance go to HMRC by the 22nd of the following month. Pension contributions follow their own schedule.

So a hire starting on the 1st of a month costs you in three separate outflows across two months. A monthly cash model smooths that out, but a tight week won’t, which is one reason a weekly view matters more as the team grows.

Building a headcount plan that holds

Four things make the difference.

Model fully loaded cost per role, not salary. One column for gross, one for employer costs, one for one-off recruitment and equipment. The total is what feeds the cash flow.

Put start dates in, not months. A hire starting on the 20th costs a third of a month, and recruitment slippage of six weeks is normal. Both change the year’s total materially.

Model the Employment Allowance as an annual pot that empties. Not as a flat monthly discount.

Tie the plan to a trigger, not a date. The second sales hire happens when the first is at quota, not in month seven because the model said so. That’s what makes the downside case real – and it links directly to the operational costs of scaling too quickly.

What this changes about the raise

If your raise is sized on a hiring plan, understating employer costs by a fifth means understating the raise by a similar proportion of its largest line. Investors notice this quickly, because headcount is the first thing they interrogate in a use-of-funds slide.

Presenting fully loaded costs, with the employer NI and pension visible, reads as a founder who has done the work. It’s a small detail that carries weight in due diligence.

The takeaway

Plan on fully loaded cost, model start dates rather than months, and treat the Employment Allowance as something that runs out. The difference between salary and true cost is usually about a fifth, which over a year of hiring adds up to roughly the cost of another person.

Get your hiring plan and your cash plan agreeing

Disclaimer: This article is general in nature and does not constitute financial advice. National Insurance rates, thresholds and allowances change at each Budget – speak with a qualified adviser (hey, that’s us!) about what applies to your situation.