Hiring an employee for your small business should be a celebration and feel like a step in the right direction and it means you are profitable and growing. But the process of hiring an employee and being an employer may be a daunting task, and you will want to make sure you consider all the costs associated with hiring an employee before you proceed. As a business owner, it will be hard enough to make the mental shift to employer, even if in theory it is a thing to celebrate as your expansion plans are coming into being.
So, how much does it cost to hire an employee?
Let’s look at feasible working example. If you plan to hire an employee full time, working 35 hours a week, and you also plan to pay them the real living wage of £10.55 per hour in London, or £9 per hour every where else in the UK, you should expect to pay your employee a basic salary of £19,201 per year in London or £16,380 per year outside of London.
But the costs do not stop there when considering how much it costs to hire an employee, and other cost to consider include costs to you as an employer, pension contributions, employer’s liability insurance and other compulsory and voluntary benefits when coming up with an employment package for a new employee. Let’s consider each of these costs in turn.
Cost of employment as an employer
As an employer, you will have tax obligations to fulfil on behalf of your employee, including paying income tax and National Insurance Contributions (NICs) to HMRC each month via Pay as Your Earn (PAYE).
You yourself as an employer are also due Employer NICs of 13.8% on any salary above the NIC threshold. The good news here is that firstly you are also eligible for the Employment Allowance from the tax authorities, designed specifically to promote growth for businesses and encourage employment. The Employment Allowance is £3,000 per annum, which means that for the first £3,000 earned by your employee, you receive tax relief on employer NIC. Anything above the £3,000 allowance earned in salary by the employee, as an employer you are due to pay 13.8% employer NIC.
You may be aware of Auto-Enrolment, which is a compulsory governmental scheme designed for all employees to pay into a pension for their retirement. The onus is an employer to enroll their employee(s) onto a qualifying staff pension scheme and deduct pension contributions from their monthly salary, as they do with income tax and NIC, before making a net salary payment to an employee. Additionally, as an employer you are also obliged to contribute to your employee(s) staff pension scheme and for the current 2019/20 tax year, the minimum total contribution expected by employee and employer is 8% of the employee’s annual salary, with a minimum of 3% from the employer and the balance by the employee.
An employee can of course opt to pay more into their pension each month and it also worth noting that the level of total contribution is subject to change based on HMRC’s budget plans.
You can find out more here on the in’s and out’s of auto-enrolment.
Employers’ liability insurance
This is a compulsory insurance if a business hires staff. The insurance is in place to protect you as an employer to protect you in the event of a claim against you as an employer for employees’ injuries or illness, whether the illness is caused on or off work site.
You can find out more here.
Other important costs to consider
If you are planning to employ one or two more staff, you will need to consider if you require additional equipment so the employee can carry out their job effectively. This could be tools, a desk, computer or a mobile phone.
Another major consideration is having a RTI compliant PAYE payroll system (to account for Income Tax and NICs deducted from your employee’s pay). You can find out more here on what is required for a payroll system.
In terms of time off, you will need to consider what holiday pay (including bank holidays) you plan to offer in your employment package, the statutory minimum in the UK being 5.6 weeks per annum, or 28 days per annum if you have an employee who works 5 days a week. You can look in more detail here on y0ur minimum legal obligation for paid holidays.
We also suggest you review the other statutory time off employees are entitled to, including sick pay and maternity/paternity pay, and you can do so here.
We hope that you have found this checklist of costs associated with employing staff useful. Clearly, there are lots of things to consider once you make the decision to proceed with hiring an employee, and a lot of these statutory requirements are in place to protect your employee as well as yourself as an employer, so certainly take comfort that by following this guide you have all bases covered in terms of cost.
We can help
We strongly recommend you speak with a tax and accounting specialist like Mirandus Accountants, who can help you set up in business and support you as you develop and grow. We are an accounting company in London who are tax accountants for the self-employed and offer accountant services for small business. You can contact us to offer a tailored solution to your unique business circumstances.
Mirandus Accountants, supporting local businesses in the City of London and Greater London area, providing accounting and tax services to SMEs and OMB clients. As strong advocates of cloud accounting and a QuickBooks Pro Advisor Practice, we offer access and training on QuickBooks as standard to all our clients, whatever stage of the business cycle.