Your potential new employee says they want to take home a minimum amount of pay each month.  They want to know how much they have to spend but you need to know how much it is going to cost you.

It doesn't matter whether you are paying regular pay or a bonus, it is never good to agree to a net figure.  It could cost you far more than you think - but why is that?

Employee pay is taxable

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 the tax due will depend on the tax code they have but it could be 20% or even 40% on top of the pay they are receiving.

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 12% on earnings above £1048 per month (employee contribution) plus 13.8% 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 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 so they know what the true cost will be to their business.