How Much Does It Cost To Hire An Employee?

You are here:
< All Topics

For any type of growing business, hiring the first employee is considered as a big milestone. However, shifting from being a business owner to an employer can be stressful and challenging. Suddenly, everything is becoming so serious. You will have some salaries to pay each week or month. Now, there is somebody relying on you!

If you want to hire someone for your business, then you should decide how much are you going to pay for them. The real living wage in London is £10.55 per hour and outside of London is £9 per hour. Assuming that your employee works 9 to 5 each day, which means 35 hours a week, then you will have to pay them a total of £19,201 yearly in London or £16,380 yearly outside London. Of course, you may decide not to pay your employees the real living wage.

If you have decided that you want to hire a second pair of hands, then you should not expect that your only expense will be the salary of your employee. There are other expenses for employment that you need to consider.

Online Accountants - Instant Quote - Xero Platinum Certified Advisers

Costs of Employment

Aside from paying for your employee’s salary, wherein you will be deducting PAYE taxes and employee National Insurance Contributions (NICs), there are other things that you need to think about.

  • As an employer, you are responsible for the NICs of 13.8% on any salary that goes beyond the National Insurance Secondary threshold, although there is a chance that this can be lessened by using the government’s Employment Allowance.
  • Employers are also liable for the auto-enrolment pension contributions. In the 2019/20 tax year, the minimum total contribution is 8%. 3% of this will come from the employer while the remaining amount comes from the employee.
  • Employers’ liability insurance.
  • Employers should supply the equipment needed by the employee so they can do their job. For instance, computer, desk, chair, etc.
  • If the PAYE payroll system that you are using is an RTI compliant, then you are responsible for its costs.  This system will be responsible for the deductions of your employee’s NICs and Income Tax.

Below, we are going to give you some samples of employees’ salaries along with NIC expenses and auto-enrolment pension costs.  You can expect that these are the expenses that your business will likely incur when you decide to hire an employee. Take note that these expenses can likely lessen the net profit of your company before any tax deduction, as a result, you will have a lower Corporation Tax bill.

For instance, if your company is located in London, you will be paying your employee a salary of £19,201, which is the Real Living Wage in London. In addition to this, you also have to pay an Employer’s NI of £1,458. The secondary threshold is 13.8% for the National Insurance (NI). All eligible businesses have the chance to claim an allowance of up to £3,000 per business by utilizing the Employment Allowance which could decrease the NIC payment. The Pension is set at £392. Take note that the pension is an Auto-Enrolment Employer’s contribution, which is 3% higher than the annual lower qualify wages, presently £6,136. Overall, the total cost of hiring an employee in London would be £21,051.

On the other hand, if your company is located in the other parts of the UK, then you will be paying a salary of £16,380 along with an employer’s NI of £1,069 and a pension of £307, with a total cost of £17,756.

The UK average salary for an employee is £28,677, while the average for employer’s NI is £2,766 and the average for pension is £676. Hence, the total average cost would be £32,119.

If you are going to pay your employee a higher salary of £50,000, then you will also be paying them a higher employer’s NI of £5,709, plus a higher pension of £1,316, with an overall total cost of £57,025.

Don’t Forget About Other Employee Privileges!

Even if you are paying your employees weekly or monthly, they won’t be actually working each day since they also enjoy other privileges such as sick pay, holiday pay, as well as maternity or paternity pay.

It is also important to ensure that you have already prepared all the accurate employment documents, contracts, and HR policies and systems. You should also consider how you are going to recruit and retain that invaluable employee.

Although hiring an employee can be scary due to its tremendous responsibilities, yet it is also an excellent way of growing your business while bringing additional skills to your company. At the same time, you can also free up your time.

Table of Contents