What are the three main costs of taking on an employee?

Business owners often want to know how much it would cost them to employ someone and of course that depends on how much you want to pay them.  But there are three things to consider.

National Minimum Wage

Everyone must be paid at least the minimum amount for their age.  In 2022-23 this is £9.50 per hour for those aged 23 or older with different rates for those below this age.  The other rates can be found on our payroll pages.

In April 2023 these rates will increase to £10.42 per hour for those aged 23 or older.

National Insurance Contributions (NICs)

An employer may need to pay National Insurance contributions on their employee's earnings.  Since November 2022 Employer NICs are due on monthly earnings over £758.  The rates for 2023-24 have not been released at the time of writing but will more than likely be the same.

The employer's contribution is 13.8% on earnings above the monthly threshold.  However you may be entitled to claim up to £5,000 annual employment allowance against this if you and the type of employment are eligible.

Pension Contributions

Employers must set up and contribute to an auto enrolment pension scheme for their employees when the employee's earnings exceed £833 per month and if they are over the current eligible age of 22 and under state pension age.   If you have just one employee earning at this level you must set up a pension scheme, even if they say they don't want to be in it.  You must also set up a scheme if an employee chooses to join it, although you may not have to contribute to it, depending on their age.

Every employee being paid £833 a month or more (before deductions) has to be put into an auto enrolment pension scheme but as long as they opt out promptly their, and your, contributions will be refunded.  Every three years after setting up the scheme you must re-enrol everyone who is eligible and they can opt out again.

The employer contribution is currently 3% of salary taken before or after tax depending on the pension scheme you set up.  The employee's contribution is 5%.

Overall Costs of paying an employee

You want to take on a new employee in April 2023 and you think you will need them to work 20 hours per week (excluding lunch breaks) over 4 days.

20 hours x £10.42 = £208.40/week = £903.07/month.  This takes them over the threshold for NICs and pension contributions.

NICs will cost you £20.02/month and pension will cost you £3.50/month.

The total cost to you monthly will be £903.07 + £20.02 + £3.50 = £926.59.  You may not have to pay the £20.02 if you are eligible to claim the annual employment allowance.

It is important that you calculate what it will cost you overall for each employee so you can budget for this.  You can set up a spreadsheet to calculate this for you so that you can change to different pay rates and/or a different number of hours.

Paying your employee

Your employee may not be paid the £903.07 you have calculated as their gross salary as they may have to pay tax and will pay pension contributions if they choose to join the scheme.  They wouldn't currently pay NICs because the threshold has increased to the same level as the personal tax allowance from November 2022.  Your employee will pay tax on their earnings if they have other income and/or do not have a standard tax code.  They will receive a payment due to them after their deductions for tax/NI/pension.

You are responsible for making any necessary statutory deductions from your employees' pay and paying the relevant amount to HMRC (tax and NI) and the pension scheme.

HMRC

You will need to register with HMRC as an employer as soon as you take on your first employee if they earn over £758 per month.  If they earn less than this and the starter form you have given them to complete shows that they have another job you must put them on the payroll because they will need to be on a different tax code so that their earnings are correctly taxed.

Once you have registered as an employer all employees, however little they earn, must be included in the payroll.

After you process your payroll each month you need to pay across to HMRC the deductions you have made from your employee for tax and NI as well as the NI that you are due to pay as their employer.  

Pension Scheme

Your new employee can be postponed from joining your pension scheme for up to 3 months which is usually the length of a probation period.  You must set up a pension scheme so that they and you can contribute to the scheme from the fourth month.  Once you have calculated the contributions due these must be paid across monthly to your pension scheme (they are usually taken by direct debit monthly).

Self-employed

You, or your employee, may think it is more cost effective for them to be self-employed but HMRC decides if this is the right thing or not and if not it could be a very expensive mistake to make.  Find out more about whether someone should be employed or self-employed from our previous blog.

Outsourcing

Of course there will be other tasks involved in employing someone.  You need to take into account having an appropriate Contract of Employment, relevant company policies to guide them, equipment for them to use, training and support (internal or external) and recruitment.  Many of the things you need to have in place can be outsourced to experts and whilst there is always a cost to outsourcing, the value lies in the time it saves you and the knowledge you have access to.  

When it comes to calculating and processing payroll and pension it is important to get it right as there is nothing worse than an employee who continually questions their pay because you keep getting it wrong.  Payroll software is available to do it for you but as with anything, its only as good as the information you put in and if you don't have the knowledge or expertise it can so easily go wrong.

Payroll and pension are easily outsourced tasks and our service supports businesses with just one employee to more than 50 employees.  We ensure businesses are paying their employees correctly and making deductions appropriately to give you peace of mind.