What does an employee cost?
As businesses become more successful, the increasing client base and workload means that they must consider additional hiring to help cope. But like any business decision, there is a major financial impact that needs to be considered. So how much does it cost to employ someone?
The headline cost
Obviously the easiest expense to quantify is that of the employee’s wages. If the worker is to be salaried, businesses can budget that expense upfront.
Annual salary = £27,000.
If your employee is paid an hourly rate, the calculation is slightly more involved, but still relatively easy to quantify in advance:
Hourly rate = £6.50
Hours worked per week = 37.5
Weeks worked per year = 50
Annual wages = £12,187.50.
But of course there are additional costs yet to consider.
Class 1 National Insurance contributions
One of the many privileges of becoming an employer is the opportunity to pay National Insurance contributions for each of your workers. Like income tax, the rates and thresholds vary according to how much you pay your employees.
For the annual salaried employee described above, the employer’s NI contribution will be £2628.07 for the 2014/2015 tax year. The cost of employment now totals:
£27,000 (salary) + 2628.07 (Class 1 NICs) = £29,628.07
The worker on minimum wage is also liable for Class 1 NICs. In their case, the cost increases too:
£12,187.50 (wages) + £651.22 (Class 1 NICs) = £12,838.72
Employee specific costs
Your business also needs to factor in the cost of equipping a new employee to do their job. These costs depend on the type of products or services offered by your business, but for an office worker they might include:
Furniture (desk and chair) = £150.00
Computer = £500.00
Software licenses = £150.00
IT set-up and support = £500.00 (per year)
Training = £500.00
There are undoubtedly other costs to consider, but at this point you need to add another £1800 to the cost. The salaried employee is now costing £31,428.07 per year, whilst the hourly-paid worker costs £14,638.72.
Other factors to consider
At this point you should have a good understanding of the most basic level of costs attached to recruitment. However, in a fiercely competitive marketplace, remuneration alone is not enough to attract the brightest and best candidates. When calculating the costs of employment, your business also needs to consider:
- Company car leasing and running costs.
- Health insurance or gym membership packages.
- Life assurance policies.
- Pension contributions.
- Annual bonuses.
- Maternity/Paternity pay.
- Jury service.
- Use of consumables like paper and printer toner.
- Admin costs, like HR, payroll and general employment paperwork.
The list goes on adding to the cost each time. Not every job attracts all of these additional costs, but it is important to be aware that there are many factors involved in accurately calculating the cost of employing someone.
Over time some of these costs should fall, but it is very important to note that the cost of employment is much higher than the headline salary, and to budget accordingly for your business.
