Hiring your first employee or expanding your team is a big milestone for any business. It signals growth, ambition, and the promise of taking your business to the next level. But have you considered the true cost of employment? Bringing someone on board involves much more than just their salary. It’s essential to plan properly to avoid financial surprises and to ensure you’re making a sustainable investment in your business.
Here, we break down the key areas you need to think about when budgeting for an employee.
- Direct Costs: Salary and Benefits
The most obvious cost of hiring someone is their salary. But remember, the amount you pay them is only part of the picture:
- Gross Salary: The agreed-upon annual or hourly rate.
- Employer National Insurance Contributions: In the UK, employers must pay National Insurance on top of their employees’ gross pay. Employers NI is currently paid on salaries over £9,100 at the rate of 13.8% from April 2025. You may qualify for Employers Allowance that would attract relief from the first £5,000 of Employers NI payable.
From April 2025, Employers NI will be paid on salaries over £5,000 at the rate of 15.5, but Employers Allowance, if applicable will increase to £10,500.
- Pension Contributions: Under auto-enrolment, you’re required to contribute to your employees’ pensions. The minimum employee contribution is 3%.
- Additional Benefits: Think about health insurance, bonuses, or other perks you might offer to attract and retain talent.
- Taxes and Compliance Costs
Employment brings with it a host of legal and tax obligations:
- PAYE and Tax Filing: You’ll need a payroll system to handle employee tax deductions and ensure timely reporting to HMRC, or you will need to outsource to your accountant or payroll provider.
- Statutory Payments: Be prepared for costs such as statutory sick pay and parental leave.
- Employment Insurance: Liability insurance is a legal requirement in most cases.
- Set-Up Costs
When an employee joins your team, there’s often an upfront investment required to get them up and running:
- Recruitment: Advertising roles, interviewing candidates, and onboarding all take time and money.
- Equipment: This might include a laptop, phone, desk, or other tools they’ll need to do their job.
- Software Licenses: Adding another user to your software systems can increase costs, whether it’s accounting, project management, creative software, or other tools.
- Ongoing Overheads
Once they’re onboard, there are additional costs to consider:
- Training and Development: Investing in your employee’s skills helps them perform better and feel valued.
- Workspace: If you operate from a physical location, there may be higher utility bills or rent as your team grows.
- Employee Wellbeing: Programmes such as mental health support or team-building activities contribute to a positive workplace culture.
- Hidden Costs
There are often overlooked expenses associated with having employees:
- Downtime: It takes time for a new hire to reach full productivity.
- Management: As your team grows, you may need to spend more time managing staff or hire someone to do this for you.
- Turnover Costs: If an employee leaves, replacing them can be costly in terms of both time and money.
Plan Ahead with Confidence
Hiring employees is a big commitment, but it’s also one of the most rewarding investments you can make in your business. By planning for all the costs involved, you’ll be in a much stronger position to scale sustainably and profitably.
To make this process easier, we’ve created a free downloadable budget template to help you calculate the true cost of employment. It includes everything from salary and tax calculations to set-up costs and ongoing expenses. Download it now and take the guesswork out of hiring.
Ready to Build Your Team?
If you’re considering hiring but feel overwhelmed by the financial implications, we’re here to help. As experts in supporting ambitious businesses, we can guide you through the process, ensuring you have the clarity and confidence to take the next step. Get in touch with us today!
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