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How Much Does it Actually Cost to Employ Someone?
The word “company” means a formed group, and comes from the latin “com”, meaning together and “panis”, which means bread. It is the idea of people coming together to share a meal and is where we also get words like “companionship”.
For businesspeople, this means that when you form a company, you do not do it alone. At some point in your company lifetime, you are going to move from being a one-person-band to an employer.
Expanding your business in this way can be both terrifying and exhilarating, but it is important that you have the financial infrastructure in place to make it work. There’s no getting around the fact that employing someone in the UK costs money.
But how much money, and where does it all go?
In this guide, we look at both the direct and indirect costs of employing someone, from the easily quantifiable salary, pension and NI figures to the less tangible costs like sharing facilities and recruitment costs.
Contents
The Direct Cost of Employing Someone
The Indirect Costs of Employment
The Cost of Hiring
Employee Benefits and Retention
Productivity
Estimating How Much it Costs to Employ Someone
How to Pay for Your Employees
The Direct Cost of Employing Someone
There are three direct legal costs of employing an individual:
- Their salary
- Employer National Insurance Contributions
- Employer pension contribution
1. Salaries
Salaries are the largest portion of the costs of employing someone. In the UK, National Living Wage (NLW) is set to £11.44 gross hourly rate for workers aged 21 and over, with minimum wage for those 18-20 of £8.60, and for 16-18 year olds of £6.40.
The National Living Wage (or Minimum Wage for under 21s) is the legal lowest amount you can pay someone, but of course it doesn’t truly represent a reasonable salary for all jobs or all locations. In order to be enticing for prospective employees, you may well want to offer salaries above the NLW, even for jobs that are considered unskilled labour.
Worked out as a full-time salary at 37.5 hours work per week, National Living Wage is equal to £22,308, calculated as £11.44 multiplied by 37.5 (hours in the week) multiplied by 52 (weeks in the year).
£22,308 is the minimum salary for a full-time employee on National Living Wage.
2. National Insurance Contributions
The next legal cost to employers is National Insurance Contributions (NIC).
NIC is calculated based on certain circumstances, with each person assigned a category (denoted by a letter). Most employees will fall under category A.
The employer must pay 13.8% NIC for all category A employees over the threshold of £9,100 per year. For a category A employee earning National Living Wage, the NIC cost will be £1822. This is calculated as 13.8% of £13,208 (the amount of earnings above the threshold).
£1,822 is the minimum cost of a full-time employees National Insurance Contributions.
3. Pensions
Alongside NIC, the employer has a legal responsibility to pay into the employee pension. While an employer can opt to pay more into the pension pot, something which is often a worthwhile incentive to entice potential candidates, the minimum legal level is 3% over the Lower Earnings Threshold (currently £6,240).
For an employee earning NLW, the minimum employee pension contribution is £482. This is calculated as 3% of £16,028 (the amount of earnings above the Lower Earnings Threshold).
£482 is the minimum cost of pension contributions for a full-time employee.
Maintaining a Minimum Standard
The above three figures represent only the very minimum legal requirement upon you as an employee. The true cost of an employee's salary, national insurance and pension contributions may well be considerably higher.
£24,612 is the minimum direct cost of a full-time employee on National Living Wage in the UK.
The Indirect Costs of Employment
Direct costs represent only a portion of the true cost of an employee. To understand the cost fully, it’s essential to consider the overheads and indirect costs to the business brought about through having an employee.
The Ability to Work
Having an employee means providing them with the means to do their job. This can have very different cost implications based on the work at hand. For example, an administrative office worker will need a desk to sit at, a chair to sit on, and a computer to work on; a delivery driver will need access to a vehicle, a means of communication, and likely a tablet or laptop for reporting.
Shared Utilities
Depending on your circumstances, general utility bills and other shared costs will also increase. While your internet bill is unlikely to increase, as one additional user is unlikely to require a change to the internet service, your electricity usage will increase, as will water usage, heating and air conditioning.
Consider how the utility bills and other shared costs will put extra regular pressure on your cash flow with an extra person in the building.
Facilities
With extra employees comes the need for additional facilities. If you are moving from being a sole trader to a limited company with employees, those facility costs can be significant.
Insurance
You have a legal obligation to take out the required insurance. You must have Employers' Liability Insurance, which ensures you can pay compensation for any employees who are are injured at work or become ill due to their work. This is in addition to any other insurance that may be relevant for your business.
Accountancy and Bookkeeping
You will need to ensure your business PAYE payroll is properly accounted for, which typically means enlisting the services of a bookkeeper. Speak to your business accountant who will likely offer this service.
The Cost of Hiring
Paying for your employee once they are working for you is becomes part of your monthly outgoings, but there is also a capital investment in obtaining an employee - that of recruitment.
Recruitment Costs
Hiring a new employee is a time consuming and often specialist job. For that reason, many companies reach out to a professional recruitment agency, but their services do not come cheaply.
If you are looking for specialised employees on larger salaries, the cost of finding the right person increases accordingly.
The alternative is to do the recruiting process yourself, but that is also not without its costs and difficulties. It takes time and skill to write job descriptions that are enticing to potential candidates, and while it is free to post a basic job on some job search websites, if you want greater reach and visibility, it will come with a fee.
Interview Time
While recruitment agencies will take much of the burden of interviews from you, you will still want to interview the short list of candidates.
Interview time is extremely costly, taking you and/or other senior employees away from your daily work to speak to potential employees, often for multiple days.
Training
Employee training is an inevitable part of recruitment and the cost stretches beyond any allocated ‘training days’. Even the best candidates are not going to hit the ground running at their best and will need time to settle into the position before they’re performing at the expected level.
The cost of training, both in visible and hidden costs, can be significant.
Employee Benefits and Retention
Enticing people to join your company and then keeping them happy once they have is an ongoing cost of employment.
Well-considered employee benefits will help you get and retain the best staff and is a worthwhile investment. Happy employees are more productive and will stay for longer, improving efficiency and reducing overall hiring costs.
It has been shown that benefits that improve the overall quality of life and work-life balance are appreciated a lot more than events such as Christmas parties or low-value gift cards. While the following are more costly that these time-honoured traditions, they are far more likely to result in employee happiness and satisfaction:
- Healthcare insurance - Offering insurance to pay additional medical expenses that are not covered by the NHS is a strong incentive in the current climate, especially dental care.
- Larger pensions - Going above the statutory 3% employee pension contribution will be seen by many as a strong perk.
- Flexible working hours - Being able to work from home, structure working hours around childcare or other home responsibilities, and a general flexibility to working hours is desirable.
- Additional holiday - Offering more paid leave is another beloved benefit.
- Bonuses and incentives - Compelling bonuses and profit-sharing will encourage loyalty and efficiency.
- Professional development - Training and education, as well as clear career advancement opportunities are key to giving employees the personal growth they’re often looking for, preventing the feeling of being stuck in a ‘dead end’ job.
- Employee discounts - If you have a product or service that is of use to your employees, consider a generous discount as a benefit. Not only is it a strong incentive, but it can be a low cost overhead.
- Childcare support - Subsidising childcare is a huge benefit for families, with the cost of childcare often preventing parents from considering full-time employment.
Depending on the level of the benefits you provide, this can be a considerable cost. It is important to understand that employee benefits are a positive investment, with funds spent in this way being offset by saving the costs of revolving staff and constant hiring expenses.
Productivity
The final cost to consider is that of your staff productivity. Improving efficiency is a key concern for most business owners, as an employee who accomplishes nothing in a day is a costly expense.
Holiday Entitlement
Having an employee absent because they are enjoying the sun half-way around the world is an undeniable cost to the business, but it is also one you must provide!
Additional holiday entitlement is a balancing act. It is a good incentive, leading to a happier employee who may well be more engaged and efficient upon their return, but it can be costly. It is not unusual to use the prospect of additional annual leave as a bonus for those who have worked for the company for several years.
Sick Pay
A second statutory regulation for time off is that of sick pay. As an employer, you must pay Statutory Sick Pay (SSP), currently set to £116.75 per week, for up to 28 weeks. Additional sick pay may be offered as an incentive, improving SSP and providing your employees with a better layer of security.
Maternity and Paternity Leave
Like holiday entitlement and sick pay, as an employer you have a responsibility to pay an employee who is absent for maternity or paternity leave.
Efficiency at Work
Day-to-day productivity and employee efficiency can be very difficult to measure and is a constant balancing act for many employers. However it is handled, there is no discounting that poor employee efficiency can be extremely expensive for the business.
Estimating How Much it Costs to Employ Someone
As can be seen, there are a significant number of factors to consider to evaluate the true cost of employing someone. For this reason, most experts have the following rule of thumb:
The additional cost of an employee is 75% to 100% of their salary.
Though only a rough estimate, it’s a figure that tends to work out in the real world. That would estimate that an employee on National Living Wage of £22,308 would cost the business between £39,039 and £44,616 per year.
£40,000, therefore, is the lowest figure you should consider for employing someone.
How to Pay for Your Employees
Ensuring that there is enough money coming in to pay for your employees is essential. Unlike other business expenses, such as marketing spend or upgrading equipment, covering your employee's salary is essential. They and their families will be reliant on the payment being made to cover their own bills and expenses, so it should be an absolute priority for you to make it on time, every month.
There is a wide range of products available that can either be used to provide the capital injection you need to invest in new employees, or offer ongoing cash flow support to make sure you always have the funds available to make salary commitments.
For professional and independent finance advice, contact Clifton Private Finance today.
