How much does it cost to employ someone for a small business?

September 11, 2024

Hiring staff is an exciting milestone for any small business, but it’s important to go into it with your eyes wide open. The costs can add up quickly, but by understanding what to expect and planning accordingly, you can make smart decisions that will benefit your business in the long run.

Hiring staff is a big step for any small business, and understanding the costs involved is crucial. It’s not just about the salary; there are several other expenses to consider that can add up quickly. Whether you’re expanding your team or bringing in your first employee, let’s break down the costs so you can budget smartly and avoid any nasty surprises down the road.

What are the main costs to employ someone in the UK?

When we talk about the cost of employing someone, most people think about the salary or hourly wage, but that’s just the tip of the iceberg. The true cost of employment includes a lot more than just what you’re paying your employee directly.

Tax, Pension, NI

First off, there’s National Insurance contributions (NICs). As an employer, you’re responsible for paying a percentage of your employee’s earnings to HMRC. For the 2023/24 tax year, that’s 13.8% on earnings above £9,100 per year. Then, there’s the pension. Thanks to auto-enrolment, you’ll need to contribute at least 3% of your employee’s earnings into their pension pot if they’re eligible.

Incentives

Don’t forget about the costs of providing any benefits. Things like private health insurance, company cars, or bonuses can significantly increase your costs. Even if you don’t offer lavish perks, simple things like training, equipment, and office space (if they work on-site) are all part of the employment cost. So, when budgeting, remember: the wage is just the beginning!

What is the cost of recruitment?

Now, let’s talk about getting that employee through the door. Recruitment can be a costly affair. The average cost per hire in the UK can vary wildly depending on your industry and how you go about the process.

Recruitment agencies

If you’re using a recruitment agency, you could be looking at a fee that’s anywhere from 10% to 30% of the employee’s first-year salary. For example, if you’re hiring someone on a £30,000 salary, your recruitment costs could range from £3,000 to £9,000 just for the agency fee. That’s before you’ve even paid them their first month’s salary!

In-house recruitment team

If you prefer to handle recruitment in-house, you might save on agency fees, but there are still costs involved. You’ll likely spend money on job adverts, possibly on multiple platforms. There’s also the time cost – if you or your staff are spending hours sifting through CVs, interviewing candidates, and making decisions, that’s time that could have been spent on other important tasks in your business. Plus, don’t forget the cost of background checks and onboarding processes.

What are other employee costs to consider

Hiring someone is a big decision, and the costs don’t stop once you’ve signed the employment contract. There are a few more things to keep in mind to ensure you’re not caught off guard by additional expenses.

Advertising

When hiring new staff promoting your job so people apply is a primary step. This includes the cost of posting job vacancies on various platforms such as job boards, social media channels, and professional networks like LinkedIn. These platforms often charge fees based on the visibility and duration of the posting.

Beyond these direct costs, businesses must also consider investments in employer branding initiatives, to attracting the top talent. Strong employer branding not only helps attract candidates but also reduces time-to-hire and enhances the quality of applicants, leading to long-term savings.

Onboarding and Training

Onboarding new employees involves more than just a welcome pack; it’s a crucial phase that sets the tone for their integration into the company. The costs associated with onboarding programs can include structured induction sessions that introduce new hires to company policies, procedures, and culture. These programs might involve presentations, workshops, and even digital onboarding platforms that require investment. Additionally, successful onboarding often includes pairing new employees with mentors or buddy systems, which, while beneficial, also represent a time investment from existing staff.

As well as onboarding, the initial training is essential to ensure new employees are equipped with the skills and knowledge necessary for their roles. This can encompass in-house training sessions tailored to specific job functions, as well as external courses or certifications that may carry additional fees. The investment in both onboarding and training is critical, as it helps reduce the time it takes for new hires to reach full productivity, ultimately contributing to their long-term success and retention within the company.

Employee Turnover

First, think about employee turnover. If someone leaves, you’ll have to go through the whole recruitment process again, which can be costly. High turnover rates can also affect morale and productivity, which in turn can impact your bottom line. It’s worth investing in good hiring practices and employee retention strategies to minimise these risks.

Streamline hiring process

Also, consider how you can streamline the hiring process to save money. Can you use social media or your existing networks to find candidates instead of paying for job ads? Are there local job fairs or university events where you can meet potential hires without the hefty price tag of a recruitment agency?

Payroll software

You’ll also need to think about things like payroll software, which helps you manage your employee payments and tax submissions. While not a massive expense, it’s another cost to factor in. And if you’re offering any extra perks, like train ticket loans or childcare vouchers, those can also add to your overall costs.

Budgeting

Finally, it’s important to budget for the future. As your business grows, your staffing needs will change, and so will your costs. Regularly review your budget to make sure you can afford to bring on new staff when needed, and consider setting aside a contingency fund for unexpected hiring costs.

How much on average does it cost to hire someone?

Adding up all the recruitment expenses, along with the ongoing costs of employment, you might be wondering, “So, what’s the total damage?” On average, hiring someone in the UK can cost anywhere from £3,000 to £15,000, depending on the role, how you recruit, and what kind of perks or benefits you offer.

Let’s break that down a bit more. Say you’ve decided to hire an office manager on a £30,000 salary. You might pay around £5,000 in recruitment costs if you use an agency. Then, factor in NICs (about £3,000) and pension contributions (roughly £900). Plus, you might spend another £1,000 or so on training and equipment. All in all, your initial outlay could be close to £10,000 on top of the salary.

And that’s just the start. Remember, these costs recur annually – you’ll need to budget for things like salary reviews, additional training, and potentially more benefits as your employee’s role grows.

What are legal costs of employing someone?

Employers’ Liability Insurance

We’ve already touched on National Insurance and pension contributions, but there are other expenses to consider too. For example, you’re legally required to have employers’ liability insurance, which covers you in case your employee gets injured or ill because of their work. This can cost anywhere from £40 to £500 per year, depending on the nature of your business.

So, while you don’t literally have to hand over cash just to employ someone, there are several mandatory and optional expenses that mean you’re always paying out more than just the salary.

Take the time to calculate all the costs – not just the salary – and make sure you’re financially prepared for the commitment. After all, your staff are one of your most valuable assets, and investing in them wisely will pay off as your business grows.

National Minimum Wage

Employers must pay at least the national minimum wage (NMW) or national living wage (NLW) depending on the age of the employee. As of April 2024, the rates are:

Apprentices: £5.28 per hour
Under 18: £5.28 per hour
18-20: £7.49 per hour
21-22: £10.18 per hour
23 and over (NLW): £11.01 per hour

Additional Resources for employing someone

If you are unsure of all your obligations, rules and regulations when employing someone it is advisable to seek further advice.

Here are some additional places to seek information:

First time employers – Employing someone for the first time

Employee hire checklist – Step by step to employing someone

Working with self-employed staff – Steps to hire self-employed staff

Get Small Business insurance with Protectivity.

If your business is growing and you’re starting to recruit more staff, taking all these costs into account is an important step. Plus, make sure you have done your research ensuring you comply with laws and regulations. Having employers’ liability is a legal requirement for any business if you hire staff, with fines of up to £2500 per day for failing to comply.

Protectivity’s small business insurance has been specifically created to support you in the event that claims are brought against your business. Public liability is automatically included and protects you if you’re sued by a third party; for example, for an injury or property damage suffered by a client or member of the public. There’s also Employers’ Liability for anyone with a team, ensuring that you’re protected against claims from workers who become injured or ill.

Find out more and get an instant quote suited to your needs.