How to calculate the cost of an employee

Making the shift from business owner to an employer?

Bear in mind you have regular wages to pay and the cost of an employee is not just the salary. There are other costs of employment you need to consider. 

How much to pay an employee? 

If you decide you want to employ someone for your business and you also choose to pay them the National Minimum Wage. For those 25 years and over, the current rate is £8.72 per hour.  Assuming a 35-hour week, 9 to 5 working week that’s a salary of £15,870 per annum. 

How much Income Tax is deductible? 

The current Personal Allowance (how much an employee can earn before they are taxed) is up to £12,570. 

The Personal Allowance will be slightly higher if your employee is claiming Marriage Allowance or Blind Person’s Allowance. It is lower if an employee earns more than £100,000 a year. 

For the current 2021/22 year: 

Band	Taxable income	Tax rate
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £150,000	40%
Additional rate	Over £150,000	45%

What are National Insurance contributions? 

Employees earning more than £183 a week pay National Insurance Contributions, which entitles them to certain benefits and the State Pension.  

There are different classes of National Insurance. Employees who are under State Pension age pay Class 1 NICs. You (the employer or your service provider) deduct these when doing your payroll. 

For the 2020/2021 tax year: 

Less than £6,515	0%
£6,515 to £9,568	£3.05 per week
£9,568 to £50,270	9% + £3.05 per week
More than £50,270	2% + £3.05 per week

Class 1 contributions are also deducted from: 

• commission or bonuses  
• Overtime 
• Sick pay 
• Maternity, paternity and adoption pay 

Auto-enrolled pensions 

As explained on The Pensions Regulator website: Under the Pensions Act 2008, every employer in the UK must put certain staff into a workplace pension scheme and contribute towards it. Failure to comply with these legal duties can lead to fines. 

Essentially, a percentage of an employee’s pay is put into a chosen pension scheme automatically each payday, with employers also having to contribute. The rates are reviewed by the Government annually. 

For the 2020/2021 tax year: 

Employee minimum contribution	Employer minimum contribution
5%	3%

Earnings for pension payments also come from: 

• commission 
• bonuses 
• overtime 
•  sick pay 
• Maternity, paternity and adoption pay

What other costs are there? 

There are a variety of other costs to consider when hiring staff for your business.  

• Recruitment costs: The cost of the recruitment process can be expensive when factoring in the tasks required. Those tasks include creating the job advert, advertising the role, interviewing the candidate and onboarding the new employee. If you use a recruitment agency, they will take a fee (usually between 15% and 20% of the annual salary) 
• Employer’s liability insurance: It’s a legal necessity to have this insurance if you employ staff. According to GOV.UK: EL insurance will help you pay compensation if an employee is injured or becomes ill because of the work they do for you. How much your policy costs will depend on the number of employees you have and also the nature of your business.  

• Criminal record (DBS) checks: Some businesses may need to carry out a criminal record check on the employee. The cost of doing a basic check is £23. 
• Membership fees: If the new staff member is part of a membership body, it is sometimes expected that the employer covers this cost if it is relevant to their role. These costs will range from £100 a year to £500 depending on the body.    
• Equipment: Depending on the job, equipment for the employee will probably need to be supplied. This could be such things as a computer, office furniture, other IT packages or uniform. 
• Training: Again, whatever the job, further training will inevitably need providing. The costs for this depend on the type and level of the training. 

Other employee entitlements 

Although you’ll be paying your employees every month, they won’t be working every day as they are entitled to: 

• Holiday pay (including bank holidays) 
• Sick pay 
• Maternity/Paternity pay 

You’ll also have to ensure that you’ve got all the correct employment contracts, documents and HR policies and procedures in place. 

To conclude 

As a rule of thumb, the cost of an employee is likely to be at least 1.5 times their gross salary. 

If you get someone else to take care of your payroll, whether a bookkeeper, accountant or another service provider, obviously you’ll have to pay them a monthly fee, but it could save you much time and effort.  

If you decide you would like to hand over the job, our team will be very happy to discuss it with you.