A big milestone for any growing business is when the first employee is hired.
Making the mental shift from business owner to employer is a tricky one – suddenly it’s all so serious. You have wages to pay every week or month – that person is relying on you!
If you decide you want to employ someone for your business, and you also decide that you want to pay them a real living wage (£10.55 per hour in London or £9 per hour outside London) then this would be a salary of £19,201 per year in London or £16,380 per year outside London. This is assuming a 35-hour week, 9-to-5 work schedule.
When it’s time to recruit a second pair of hands, don’t make the mistake of thinking that your only expense will be your employee’s salary. There are other costs of employment you need to consider.
Costs of employment
Aside from your employee’s salary, from which you must deduct any PAYE taxes and employee National Insurance Contributions (NICs), as an employer, you’re also responsible for:
- Employer’s NICs of 13.8% on any salary above the National Insurance Secondary threshold (although you may be able to reduce this using the government’s Employment Allowance)
- Auto-enrolment pension contributions, the minimum total contribution is 8% in the 2019/20 tax year, with a minimum of 3% coming from the employer and the balance from the employee
- Employers' liability insurance
- Equipment required by the employee in order to do their job (think desk, computer etc.)
- Any costs of running an RTI compliant PAYE payroll system (to account for Income Tax and NICs deducted from your employee’s pay)
The following are examples of the main salary, auto-enrolment pension and NIC expenses your business will incur when you take on an employee. All of these expenses reduce your company’s net profit before tax, which will lead to a lower Corporation Tax bill.
* National Insurance (NI) Secondary threshold (13.8%). Eligible businesses may be able to claim an allowance of up to £3,000 per business using the Employment Allowance which could reduce the NIC payment. ** Pension Auto-Enrolment Employer’s contribution (3% above annual lower qualify earnings, currently £6,136).
Don’t forget about other employee entitlements!
Although you’ll be paying your employees every week (or every month) they won’t actually be working every day as they’ll be entitled to:
You’ll also need to make sure that you’ve got all the correct employment contracts, documents and HR policies and procedures in place as well as thinking about how to recruit and retain that valuable employee.
We’ve written a small business checklist to take you through everything you need to know about hiring an employee.
Scary levels of responsibility aside, taking on an employee is a great way to grow your business, bring extra skills into the company, and free up your time.