The Real Cost Of Hiring An Employee
Hiring your first employee
Hiring your first employee is a very exciting milestone for the business and a sign that your business has seen positive growth. Not only will you have to figure out the salary you wish to pay your new hire, but you must also consider other factors that will impact your budget, which make up the true cost of hiring an employee.
From recruitment to onboarding expenses:
When deciding whether to hire a new employee, it entails more than just whether there is a budget for their salary. Before making the decision, factors such as the recruitment of the new hire and how much it will cost to onboard and train the new employee need to be analysed.
In terms of recruitment, there are two avenues you can utilise. One is doing it yourself through channels such as LinkedIn and job sites, which may charge a fee. The other is using a recruitment agency, which can cost anywhere from 20% to 30% of the salary offered, depending on the agency and how niche the role is.
For example, a role of £40k per annum could cost up to or more than £8,000 in recruitment fees.
You also need to factor in the time spent training the new hire and any additional licences, office setup, or technology required for them to perform their role. These are various examples of expenses that businesses must consider to accurately gauge the financial impact of bringing in new talent.
How do national insurance contributions affect hiring costs?
UK employers are legally obliged to pay employers’ national insurance contributions to all employees over 21, who earn over £175 a week.
How much you will pay in national insurance contributions depends on the national insurance category your employee is subject to; generally, the employer will be subject to 13.8% for most average employees.
So, for example, on an employee salary of £40,000, you would pay £355.40 per year in employers’ national insurance.
However, there is Employment Allowance available for small businesses as tax relief to help reduce class 1 employers' national insurance contributions for up to £5,000 a year. To qualify, several factors must be met, one being that you must be a registered employer and have at least one employee over the Ni threshold.
How do I calculate employers' pension contributions?
All employers in the UK must offer a workplace contribution by law and are legally required to contribute monthly to each employee's pension. The employer must legally contribute 3% of their employee's monthly salary into the fund and the employee 5%, taking the total minimum contribution to 8%. They can also choose to match the employee's contribution; however, they are not legally obliged to do so.
To determine how much the employee's pension contribution would be, you need to calculate the qualifying earnings of the employee's salary.
For example, if your employee's qualifying earnings equated to £30,000 a year, you would need to work out 3%, which would be £900 per year in employee's pension contributions or £75 a month.
The employee can choose to opt out of the workplace pension as well as utilise a privately chosen pension scheme instead. However, it is mandatory for the business to auto-enrol employees every three years as part of their legal responsibility.
How much will employee benefits cost?
One thing to consider when hiring an employee is whether you will offer benefits in addition to their salary. These are sometimes referred to as 'fringe' benefits or benefits in kind. They are great for attracting and retaining staff and can boost morale and well-being within the business.
When it comes to employee benefits, there is no one-size-fits-all. They will depend on individual companies and the budget available. For instance, some larger companies may offer health insurance, gym memberships or a car allowance to benefit their employees.
Some benefits are tax-free to the employer and the employee. These are usually common workplace benefits that are necessary to help the employee perform their role, such as home office equipment, a bike as part of the cycle-to-work scheme, or, for instance, a staff party.
However, the majority of benefits in kind, such as health insurance, car allowances, gym memberships, etc., will attract tax. The cost of the benefit offered to the employee is that the employer will have to pay employer national insurance, which is 13.8% of the deemed value of the benefit.
What are the additional costs of hiring an employee?
When hiring your first employee, it's crucial to plan in your budget for statutory and legal obligations such as sick pay, maternity leave and holiday leave entitlement. These aspects not only impact the financial budget of the business but also reflect your commitment to employee welfare and legal compliance.
Full-time employees are entitled to 28 days of holiday entitlement a year, which may or may not include bank holidays at the employer's discretion. It is important that the cost of providing paid annual leave is in the budget and there are sufficient staff to cover employee absence if on holiday as well as illness.
For illness, some companies offer a limited amount of sick days at full pay for their employees, but this is at the employer’s discretion. Otherwise, all employers in the UK are legally obliged to offer statutory sick pay, which is currently set at £109.40 per week and can be claimed for up to 28 weeks in a year.
Employees are also entitled to maternity leave which, currently, stands at up to 39 weeks for fulltime employees and is paid at either 90% of their gross weekly earnings(before tax) for the first six weeks, then after either £172.48 or continued at 90% if lower than the set amount for the next 33 weeks.
To summarise, hiring your first employee marks a significant milestone of growth for your business, but it is imperative to factor in the financial implications behind the salary. From recruitment and onboarding expenses to national insurance and pension contributions, to name but a few, all of these aspects add to the true financial commitment of bringing new talent on board. Employee benefits can be a strategic move to attract and retain talent, but balancing the costs with the benefits they bring to both the employee and the business is essential.
By thoroughly understanding and accounting for all these various aspects, businesses can make informed decisions when hiring their first employee and ensure not only helping the financial longevity of the business but also its sustainability and future success.
