At first, it might seem like a simple question to answer. If you’ve decided how much to pay your new employee it should be pretty straightforward to work out the hourly rate or the annual salary… and bingo!
Well almost – but not quite. Have you thought about all the hidden costs of employing someone and including them in your business figures?
You might think that you’re going to pay your employee £18,000 per year, but on top of this you need to allow for a variety of additional costs. Let’s have a look at them:
Employer’s National Insurance Contributions
Employers National Insurance Contributions are 13.8% of your employees earnings above £169.01 per week if your employees are over 21 years of age or an apprentice under 25.
So, for a salary of £18,000 per year your Employer’s National Insurance Contributions will cost £1,271.81 per year.
Workplace Pension Employer’s Contributions
Workplace Pensions became law in the Pensions Act 2008. It requires employers to enrol Eligible Workers into a pension scheme within three months of joining.
There may be costs associated in setting up the pension scheme, especially if you seek professional advice.
You’ll need to assess your workers to identify who needs to be enrolled in your pension scheme. Your payroll service provider will do this automatically when the payroll is run.
If your employee is an Eligible Worker and earns more than £6,240 per year, then your Employer Pension Contributions are a minimum of 3% of earnings above £6,240 per year.
For a salary of £18,000 per year your Employer’s Pension Contributions will cost £352.80 per year.
A lot of companies offer additional employee benefits to make the job role even more attractive during the recruitment process as well as keep their team motivated and happy. This can be anything, from a car for business use to a gym membership or free lunches. Keeping your employees satisfied with their jobs can really add to the costs, so don’t overlook them.
Your employees will almost certainly need resources, whether working from home or at your business premises.
These could include a desk and chair, a computer and other equipment that they may need. You may have to pay software licenses for each of your employees and IT support.
If you have an office that accommodates ten people, you ought to allocate a proportion of your office overheads (including heating, lighting, cleaning, etc) to each employee.
Unproductive and wasted hours
You may have told your new employee that they will work a 35 hour week, but how many productive hours will they really work during the year? A considerable portion of the working hours you pay for are for the time your team is not actually being productive or generating profit. For example:
- Statutory holiday allowance
- Sick leave
- Maternity / paternity leave
- Other non-productive time: visiting the restroom, brewing coffee, surfing the internet or socialising
And there is the risk of employees with poor performance or issues that could cost you additional time and increased hidden costs.
The real cost of an employee
After adding all of these up, the picture starts to look quite different… That £18,000 a year you started with is growing bigger and the cost per hour is increasing. It’s no longer the £9.89 per hour (for a 35 hour week) that you budgeted.
In fact, your costs are now almost double the amount. You employees are likely to cost you over £33,000 per year (that’s £18.13 per hour).
If you want to find a more accurate answer and test it with your own figures, then try our handy True Cost of an Employee Calculator.
What’s the alternative?
Many businesses decide that taking on a new employee is not essential for their company and choose to outsource the service to a specialist. You can outsource a number of business processes, including payroll and accounting, marketing activities, IT operations and Human Resource Management.
Outsourcing can create a smarter business by significantly reducing your costs, saving lots of your time and having experienced professionals work for you.
If you want a smarter and more cost-efficient business, why not start with outsourcing your accounting?
Here at ASfB, we provide our clients with an Outsourced Virtual Accounts Office to fully manage their Finance Function. We look after day to day accounting and bookkeeping, VAT and payroll management, and much more.
In addition to managing your finance function, we can give you expert business growth advice and help with strategic business decisions.
If you would like to discuss this further, call our friendly team on 01202 755600 or drop an email to firstname.lastname@example.org.