Key facts at a glance
£80K salary, true Year 1 cost
£120,971
51% above the advertised salary
Break-even vs contractor
£380/day
Below this, a contractor is always cheaper
12-month contractor vs permanent
Permanent wins
By £29,141 at £500/day, 46 weeks
Here is the number before the breakdown: an £80,000 software engineer costs a UK employer roughly £104,971 a year in ongoing employment cost, not £80,000, and £120,971 in Year 1 once a typical agency recruitment fee is added. That is 51% above the number in the job advert, and it is the reason a £500/day contractor, which sounds far more expensive on paper, is often the cheaper option for anything shorter than a quarter.
Every one of the costs stacked on top of salary is real and largely unavoidable: Employer National Insurance is statutory, pension auto-enrolment is statutory, and recruitment fees are the market rate for sourcing a hire through an agency. None of it shows up in the number candidates negotiate over, which is exactly why so many hiring budgets run over without anyone being able to point to a single mistake.
Compare a contractor against a permanent hire for your exact salary and engagement length.
Open the calculatorWhat actually sits on top of a UK salary
Employer National Insurance is the largest and least visible on-cost. It runs at 15% on earnings above the £5,000 secondary threshold, both figures changed in the October 2024 Budget (up from 13.8%, with the threshold cut from £9,100), effective April 2025. Unlike Income Tax, it is paid entirely by the employer and never appears on the employee's payslip, which is exactly why it is so often left out of an informal hiring budget.
Auto-enrolment pension adds a statutory minimum of 3% of qualifying earnings, calculated only on the band between £6,240 and £50,270, not the full salary. Health insurance, equipment, and software licences are discretionary but standard in competitive tech hiring, and a one-off agency recruitment fee, typically 15-25% of first-year salary, applies to any hire sourced externally rather than through an internal talent function or referral.
The full on-cost stack on an £80,000 salary
10% bonus, standard benefits, agency-sourced hire. Figures calculated live from the same engine behind our Contractor vs Permanent Hiring Cost Calculator.
| Cost item | Amount | Note |
|---|---|---|
| Base salary | £80,000 | The number in the job advert |
| Employer National Insurance | £12,450 | 15% above the £5,000 secondary threshold |
| Employer pension (auto-enrolment) | £1,321 | 3% minimum on qualifying earnings |
| Health insurance | £1,200 | Typical private medical benefit |
| Equipment and setup | £2,000 | Laptop, monitor, software licences |
| Recruitment fee (one-off) | £16,000 | 20% of salary, agency-sourced hire |
Total Year 1 cost: £120,971. Ongoing cost from Year 2 (no recruitment fee): £104,971. Run your own salary, bonus, and benefits package on the calculator.
The crossover point: when does a contractor stop being cheaper?
At £500/day with a 20% agency margin (£600/day effective), a contractor is cheaper than the equivalent £80,000 permanent hire for a 3-month engagement, but the permanent hire pulls ahead somewhere between 3 and 6 months, and the gap widens every month after that.
| Duration | Permanent (incl. recruitment) | Contractor | Cheaper option |
|---|---|---|---|
| 3 months | £40,224 | £36,000 | Contractor by £4,224 |
| 6 months | £62,429 | £69,000 | Permanent by £6,571 |
| 9 months | £86,653 | £105,000 | Permanent by £18,347 |
| 12 months | £108,859 | £138,000 | Permanent by £29,141 |
How to use this when deciding contractor versus permanent
Work out your break-even day rate first: the contractor day rate at which annual cost matches your permanent total cost of employment. For an £80,000 role with standard benefits, that is roughly £380/day at a 20% agency margin. Any contractor quote below that figure is cost-competitive with a permanent hire even over a full year; above it, the case for a contractor rests on flexibility and speed, not cost.
Then map the engagement length you actually expect against the crossover point, roughly 4-5 months at these figures, rather than defaulting to whichever option looks cheaper on a per-day or per-year basis in isolation. A genuinely short-term need (cover, a defined project, a specialist skill gap) usually favours a contractor regardless of the day rate; an ongoing role almost always favours permanent once the full on-cost stack is priced in.
Run your own salary and engagement length
See your exact break-even day rate and the true Year 1 and ongoing cost of a permanent hire.
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Frequently asked questions
What does an £80,000 software engineer actually cost a UK employer?
Roughly £104,971 a year in ongoing cost, not £80,000. Employer National Insurance adds £12,450 (15% above the £5,000 secondary threshold, including a 10% bonus), auto-enrolment pension adds £1,321, and typical benefits (health insurance, equipment) add a further £3,200. Add a one-off 20% recruitment fee (£16,000) for an agency-sourced hire, and Year 1 cost reaches £120,971, roughly 51% above the advertised salary.
Is a £500/day contractor cheaper than an £80,000 permanent hire in the UK?
It depends entirely on how long you need them. For a 3-month engagement, the contractor is cheaper (£36,000 versus £40,224 for a prorated permanent hire including recruitment costs). Past roughly 4-5 months, the permanent hire becomes cheaper, and by 12 months the gap is £29,141 in the permanent hire's favour. Contractors are a short-term cost-efficient choice; permanent hires win once an engagement runs past around a quarter.
What is the break-even day rate against a permanent hire in the UK?
For an £80,000 role with typical benefits, the break-even day rate is roughly £380/day at a 20% agency margin. Below that day rate, a contractor is cheaper than the equivalent permanent hire even over a full year. Above it, the permanent hire wins on cost the longer the engagement runs, since the contractor's day rate compounds weekly while the permanent hire's on-costs are largely fixed.
Why is Employer National Insurance the single biggest hidden cost?
Because it scales directly with salary and bonus, with no cap, at 15% above the £5,000 secondary threshold (increased from 13.8% and cut down from a £9,100 threshold in the October 2024 Budget, effective April 2025). On an £80,000 salary with a 10% bonus, Employer NI alone adds £12,450, more than the combined cost of pension, health insurance, and equipment together. It is also the on-cost most commonly left out of informal 'what will this hire cost us' conversations.
How much does UK auto-enrolment pension add to hiring cost?
The statutory minimum is 3% of qualifying earnings, calculated between the lower (£6,240) and upper (£50,270) qualifying earnings limits, not the full salary. On an £80,000 salary, that caps the pensionable band at £50,270, producing a contribution of roughly £1,321 a year. Employers offering a more generous match, common in competitive tech hiring, should budget well above this statutory floor.
Should recruitment fees be included in the true cost of hiring?
Yes, at least for Year 1. A typical agency recruitment fee runs 15-25% of first-year salary for a mid-to-senior technical hire, a one-off cost that materially changes the short-term comparison against a contractor. Ignoring it understates true Year 1 cost and can make a permanent hire look artificially competitive against a short engagement, when the reverse is often true once the fee is included.
Does this true cost calculation change for a startup versus an established company?
The core on-costs (Employer NI, pension) are identical regardless of company size, since they are statutory. What varies is discretionary spend: startups often skip health insurance and offer smaller equipment budgets, while established companies add benefits that push total cost well above the figures here. Recruitment fees also vary: startups without an internal talent function typically pay full agency rates, while companies with in-house recruiters can cut that cost significantly.
How does this compare to the equivalent calculation in Ireland?
The mechanism is broadly similar, employer PRSI in Ireland plays the role Employer NI plays in the UK, but the specific rates and thresholds differ meaningfully. Ireland also has its own auto-enrolment pension scheme (My Future Fund) phasing in from 2026, which changes the pension on-cost calculation for Irish employers in ways that do not apply in the UK. If you are comparing hiring cost across both markets, run each country through its own dedicated calculator rather than applying one country's on-cost percentages to the other.
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