Costs Associated With Hiring Your First Employee

Costs Associated With Hiring Your First Employee

Simon Thomas, Founder and Managing Director of Ridgefield Consulting, talks us through the unexpected costs associated with hiring your first employee as a small business owner

By Simon Thomas

As a small business owner, taking on your first employee is an exciting time. Your business may be growing or you might need someone to help manage all the daily tasks that are stopping you from scaling the business. But there are several costs aside from their basic salary that you may not have considered. Here's a quick rundown: 

Recruitment

The costs of hiring someone start before you’ve even made a job offer. Recruiting the perfect candidate for your business isn’t easy and it can be hard to let go of the tasks you have been managing yourself, so finding the right candidate is vital. Most people will choose to go through a recruitment agency or online job board, such as Indeed or LinkedIn.

Agencies will typically have fees that vary depending on several criteria. The most common pricing strategy is when the agency fees are a percentage of the annual salary for the position you’re hiring for, but they will also vary depending on the number of roles and difficulty of finding suitable candidates.

When you recruit someone, you will also have to write up a formal contract of employment and carry out background checks to verify their right to work in the UK. All these costs will be incurred before the employee can start working for you.

National Insurance

In addition to the employee’s salary, you also need to factor in mandatory costs such as National Insurance. National Insurance is tax on earnings that goes towards paying for state benefits such as state pension, statutory sick leave, and other benefits. Your employee will have to pay Class 1 National Insurance from their salary (depending on their income), but as an employer you may also have to pay a contribution on your employee’s earnings.

As an employer, you may also have to pay an employer’s contribution of 13.8% depending on the category your employee falls into based on their salary and personal circumstances. The categories are defined by HMRC, with each letter representing a different group of employees based on personal circumstances including age and weekly income. A full breakdown of amounts and categories can be found on the HMRC website.

Pension

As an employer, you are legally obliged to provide a workplace pension scheme for all employees if they meet the following criteria:

When taking on an employee, you must enrol them into a workplace pension scheme within three months of their employment. The amount you must pay into an employee’s pension depends on whether the employee has been enrolled into a workplace pension scheme or a private pension scheme offered as a workplace benefit.

The government has set a minimum pension contribution which means that in order to run a workplace pension the employee must contribute at least 5% of their salary and you, the employer, must contribute at least 3% of their employee’s salary. However, some companies will choose to offer even more generous pension contributions by offering to match an employee’s contribution up to a certain amount.

Sick leave

Sick leave is an unavoidable part of taking on employees. Sadly, no one is immune to illness and so when you take on other staff, it's inevitable that someone may become sick at some point. As an employer, you legally have to offer Statutory Sick Pay (SSP) to all employees who are too sick to work. The current minimum rate is £95.85 per week for up to 28 weeks, although some employers may choose to offer more.

For an employee to get SSP they must have four ‘qualifying days’ off sick where they would ordinarily have worked. After this point they are entitled to SSP for up to 28 weeks or until they are deemed fit to return to work by a medical professional.

In light of the current situation with coronavirus, if an employee is self-isolating for one of the following reasons, they can also claim SSP:

Equipment

It’s easy to get tied up in all the legal costs associated with getting someone onto your company’s payroll but there are other more practical costs that should be considered as well. When you take on a new employee you will need to provide them with the equipment they need to do their job, all of which comes at a cost to the company. The equipment will vary depending on the role but could be anything from a computer and phone to tools, uniforms, office furniture and more.

It's worth noting that most of these costs can be claimed back as expenses against the company’s gross profit, in turn reducing the amount of corporation tax you will have to pay so it’s not necessarily a negative cost but is something to factor in.

Training

As with any new job, it will take time and money to train an employee on the processes and systems involved when starting at a new business. Irrespective of how experienced the new employee is, there will be a period in which they need to learn how your business works, meaning you will have to dedicate time to get them up to speed with your way of working. It’s a short-term cost that in the long run will benefit your business, meaning you can share the workload with your new employee and focus on what’s important to you.

There may also be long-term training costs to consider, for example if you take on someone who is newly qualified or an apprentice then they will require investment to help them develop and qualify in their trade. A good example is a junior accountant; they may be educated to degree level to undertake accounting and bookkeeping but, as their employer, you may want to invest in helping them become chartered accountants or technicians so that they can sometimes sign off work. Equally any other trade will have similar qualifications which may be important for a junior member of staff to gain as part of the growth of your business.

In summary, taking on an employee is a big decision as it’s the first step in scaling your business. However, it’s important to understand the true costs of taking on an employee to make sure you can afford it. 

About the Author

Simon Thomas is the Founder and Managing Director of Ridgefield Consulting, Oxford’s leading independent accountancy firm. Simon has over 15 years’ experience as a chartered accountant and founded Ridgefield Consulting in 2010 after working for EY, one of the big four accountancy firms in London and the UK. Ridgefield Consulting offer a wealth of expert knowledge on employee’s payroll including auto-enrolment and maternity pay.