Employee costs – how to work them out
Posted on 4th July 2022
As your business grows you will need some extra help. If you’re thinking about taking on an employee do you have a full picture of the costs?
Staff costs are one of the biggest expenses for a business, but you will need to cover more than your employee’s salary. There are extra costs, often called 'on-costs', to take into account too.
Understanding all the costs involved in employing someone can help you plan and set realistic budgets. Here are the things you will need to include:
Recruitment – when you’re recruiting an employee you will need to allow a sum for advertising, interviewing and onboarding. If you work with an agency, their finder’s fees and administration costs can be substantial.
Relocation – if your business requires specialist skills you might need to look for a suitable candidate nationally. Contributing to the cost of relocation can help you to secure the right person. This might include moving costs, paid leave or storage, for example.
Basic salary – of course, the amount you pay your employees each year must be included in your costs.
Administration – a new employee will need to learn about your business, be given permission to access your building, systems and equipment. You might need to include them in your insurance policies, organise meetings and provide them with suitable registrations, identification and stationery. There will also be a cost involved in adding them to your payroll, paying them, and reporting on their income.
Holidays, sickness and absences – you will need to cover the costs of your employee’s annual holidays, public holidays, sickness absences, and maternity or paternity leave so it’s important to include these things in your calculation.
Office costs – you will probably need to allow for the cost of additional business space and communications such as access to the internet, a smartphone, and a dedicated telephone number.
Management – while this might not be an actual financial cost you will also need to think about guidance and on-the-job training as well as skills-based training. Human Resources or HR support such as drawing up a contract of employment and managing any grievance policy will also be needed as well as appropriate Health and Safety assessments, policies, procedures, training and equipment.
Company car – if your employee needs to travel as part of their role you might consider providing a company car which will be seen as a benefit in kind so national insurance contributions (NICs) and tax will be payable. Whether you purchase or lease a vehicle the cost will be included in your company’s capital allowance.
Bonuses – bonuses are a good way to motivate your team and encourage loyalty and performance. However, although some types of bonus are tax free the HMRC will regard any form of payment as a benefit and it will be taxable. If you give a gift instead of a financial reward, it will be treated as a benefit in kind with a value that will also be taxable.
Taxes – not all of the money someone earns is taxable because of the personal tax allowance which is exempt, and some people receive additional allowances, such as the Blind Persons Allowance. This will affect your employee’s take home pay so you will have to bear it in mind when you work out their salary.
Employer NICs – NICs are paid by you as the employer and by your employee. Class 1 contributions are deducted from your employee’s gross pay and employer NICs are charged at various percentage rates, depending on the salary.
Pension – employers must offer their employees a workplace pension scheme although they can choose not to take part. However, as an employer you can’t refuse anyone who wants to join the scheme. Contributions are paid by the government, employer and employee.
Medical insurance – this is often seen as an attractive employee benefit. Your company plan could offer dental care, eye tests, and general health cover, for example. However, it will be seen as a taxable benefit in kind, although the calculation isn’t straightforward.
Shares – you can give employees shares in your company which might be eligible for tax and NIC relief in some circumstances, although it is quite strictly controlled.
As you can see, working out the real cost of taking on an employee is quite complicated and could cost up to an additional 50% or 75% of their salary.
If you would like some help or advice before deciding whether it’s the right time to take on an employee for your business please get in touch.
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