How much does it cost to hire an employee?

As your business grows, you’ll likely reach the milestone of hiring your first employees. As exciting as this can be, it’s also quite daunting. While you may know how much a fair salary is for your work, figuring out all the additional costs of hiring a new team member can be more difficult. From tax and pensions to insurance and holiday pay, here we round up the things you need to be aware of so you can be clear on the true costs associated with hiring an employee.

Costs of employment

Recruitment costs 

The first cost you’ll need to cover is the fees associated with finding the right person to fill the role. Depending on the position you’re trying to fill, this could be as simple as a post on LinkedIn, a free ad on a job site or advertising in local media. However, the costs can quickly add up for more senior or specialist roles. In this case, your best bet may be to use a recruitment agency. These often work on commission, so expect to pay 20-30% of the employee’s starting salary. Also, remember to factor in the time it will take to hire an employee, whichever route you go down – from reading CVs to conducting interviews, hiring staff can be a long process.

Salary

Next up, you’ll need to decide how much you’re going to pay your new employee. Again, this will vary massively depending on your industry and the level the new employee will be working at. Currently, the median average salary for workers in the UK is around £33,280 a year, rising to £41,866 in London, so expect this to be the most significant cost associated with your new hire. 

Minimum, national living and real living wage 

You could also pay someone based on the Minimum, National Living or Real Living Wage. If the person you’re hiring is between 16 and 23, they must be paid at least the minimum wage. This currently stands at £5.28 for under 18s, £7.49 for 18-20-year-olds and £10.18 for those aged 21 and 22. Once an employee reaches the age of 23, they must be paid at least the national living wage of £10.42. While the government calculates the national living wage, the real living wage is independently calculated based on the cost of living. It currently stands at £10.90, rising to £11.95 in London. 

National insurance 

On top of paying the salary of your new employees, you’ll also need to start making employer’s national insurance contributions. Employers pay Class 1 National Insurance contributions on all employee earnings above the secondary threshold of £175 a week. The rate of National Insurance for employers is 13.8%. This means if you were to pay an average salary of £33,280, you could expect to pay around £3,300 a year in national insurance for that one employee. You must also pay national insurance on any cash bonuses you give your employees.

Pension contributions 

You may also have to enrol your staff into a workplace pension scheme as an employer. This will be the case if your employee is not already in a workplace pension scheme; they’re aged over 22 but under retirement age, and they’ll be earning £10,000 or more a year. While the idea of setting up a workplace pension scheme may be off-putting, the Pensions Regulator has a tool for employers that guides you through what you need to do. If you automatically enrol your employee, you must contribute at least 3% of their qualifying earnings – currently between £6,240 and £50,270. If they voluntarily enrol into a workplace pension scheme, you must contribute the 3% minimum if your employee earns more than £120 a week, £480 over four weeks, or £520 a month. 

Insurance

Once you hire an employee who isn’t a family member, you’re legally required to take out employers’ liability insurance worth £5 million from an authorised insurer. If you’re registered as a limited company, you must take out a policy even if you only employ family members. The costs of the policy will depend on things such as how many employees you have and the risks associated with your business. This could be as little as a few pounds a month but could rise to hundreds a month, so it’s worth shopping around. 

Training

Now you have your employees in place, they must be able to complete the tasks you need them to, so it can be worth setting some money aside for training. This could be external training on software or internal training on processes, or a mixture of both. Ongoing training and development is also a great way to retain employees and keep them motivated.

Other essential costs of employment 

While all of the elements above may seem more than enough to think about, there are some often overlooked additional costs associated with having an employee that also shouldn’t be forgotten. For example, for your employee to do their job effectively, you may need to invest in new equipment, software licences and maybe even office space, depending on your current setup. There are also several statutory benefits that you must give to any employees. For example, they’ll be entitled to 28 days of paid holiday, during which time you may need to bring in temporary staff, parental leave and sick pay – currently set at £109.40 a week for up to 28 weeks.

Given the costs associated with hiring an employer, you may also offer additional benefits such as a bonus scheme, commission, a company vehicle or social events. Many of these will also have tax implications, so check the total costs associated with any initiatives before committing to them.