Your potential new employee says they want to take home a minimum amount of pay each month.  Sounds straightforward - so why would you be a fool to do this?

Why - because you have no idea how much it will cost you to pay them this amount.

Employee pay is taxable

So you need to add the tax that is due on their pay to the take-home pay you have agreed to pay them.  The amount of tax due will depend on the tax code they have.  If it is a standard tax code you will pay an additional 20% on earnings above £1048 per month.  They may have another job, in which case all their pay will be taxable and you will have to cover the 20% on everything you pay them.

However they could have a very different tax code if they have previously been self-employed and have elected to have tax owed collected through their tax code.  If this was the case and you had agreed a take home pay you would be paying the tax they owe from their earnings previously!

Employee pay is subject to National Insurance Contributions

Unless your employee is over state pension age you will have to add both the employee and the employer contributions to their take-home pay.  That will be 13.25% on earnings above £1048 (employee contribution) plus 15.05% on earnings above £758 per month (employer contribution).

Employee may be eligible to join your auto enrolment pension scheme

Employees who are eligible must be opted into your pension scheme so you must take this cost into account.  They may, of course, decide to opt out at a later date which will reduce the cost to you.  Pension contributions are 5% for employees and 3% for employers - a total of 8% on top of take-home pay above £833 a month.

Employee may be repaying a student loan

Contributions are taken from gross pay so you would also be paying off their student loan for them.

Attachment of Earnings Orders

Whilst these are taken from take-home pay after deductions, they will be reducing the amount of pay your employee takes home and they may argue that this was not the amount agreed verbally and/or in their written contract.

Summary

If you offer your potential new employee a gross pay of say £24,000 a year the cost to you will be 

  • Gross Pay + Employers National Insurance Contribution + Employer Pension Contribution

If you offer your potential new employee a take-home pay of say £2,000 a month (£24,000 a year) the cost to you will be

  • Take Home Pay + their tax liability + their employee NI + your employer NI + their pension contribution + your pension contribution 

It could even include you covering their student loan repayment, their Attachment of Earnings Order and any tax owing from previous earnings

You can't plan for the cost of this new employee because you have no idea before they start and hand you their P45 (if they have one) what their tax situation is. 

What to pay?

Decide what your business can afford to pay and always offer Gross Pay i.e. before deductions.  Don't be a fool and get pulled in to offering a take home pay.  We frequently calculate the cost of a range of pay scales for the employers we work with and give them an idea of take home pay in case the employee wants an idea of what they might receive after standard deductions.