The decision to hire your first employee is a big one for any small businesses. It marks a turning point from being a solo entrepreneur to having to manage someone else.
Your responsibility increases as they are now relying on you for their living but it also means that you can free up some time to concentrate on other aspects of your business.
Before you take on someone new, it’s important not to make the mistake of thinking that their wages are the only cost that you need to account for. There are many other added financial contributions and considerations such as National Insurance and pensions that you will need to allow for in order to work out the true cost of your new employee.
So, how much does it really cost and what should you be considering, apart from an extra pair of hands? Often, what you can afford dictates the hours you can offer so let’s start with what you have to pay.
The National Minimum Wage is the minimum pay per hour almost all workers are entitled to. Employees have to be over the school leaving age to get the National Minimum Wage.
The National Living Wage is higher than the National Minimum Wage and employees are entitled to it if they’re over 25.
Apprentices are entitled to the apprentice rate if they’re either:
- Under 19 years old
- 19 years old or over and in the first year of their apprenticeship
|Year||25 and over||21 to 24||18 to 20||Under 18||Apprentice|
|April 2017 (current)||£7.50||£7.05||£5.60||£4.05||£3.50|
Example: An apprentice aged 22 in the first year of their apprenticeship is entitled to a minimum hourly rate of £3.50 (rising to £3.70 in April 2018)
Apprentices are entitled to the minimum wage for their age if they both:
- are aged 19 or over
- have completed the first year of their apprenticeship
For example, an apprentice aged 22 who has completed the first year of their apprenticeship is entitled to a minimum hourly rate of £7.05 (rising to £7.38 in April 2018)
National Insurance Contributions
You will also have to pay Employees Class 1 National Insurance Contributions (NIC) on top of their salary, depending on how much they earn.
This is calculated as a percentage of their salary when they earn over £156 a week (rising to £161 in April 2018).
|Employee basic pay||Class 1 National Insurance rate|
|£157 to £866 a week (£680 to £3,750 a month)|
£162 to £82 a week in 2018-19
|Over £866 a week (£3,750 a month)|
Over £892 a week in 2018-19
Class 1 National Insurance thresholds
Employers and employees pay Class 1 NI depending on how much the employee earns.
|£ per week||Weekly||Monthly|
|2017 to 2018|
(2018 to 2019)
|Lower Earnings Limit (LEL)|
Employees don’t pay NI but get the benefits of paying
|Primary Threshold (PT)|
Employees start paying NI
|Secondary Threshold (ST)|
Employers start paying NI
|Upper Accrual Point (UAP)|
Employees with a contracted-out pension pay a lower rate of NI up to this point
|Upper Earnings Limit (UEL)|
All employees pay a lower rate of NI above this point
|Upper Secondary Threshold (UST)|
Employers of employees who are under 21 pay zero rate up to this point
|Apprentice Upper Secondary Threshold (AUST)|
Employers of certain apprentices who are under 25 pay zero rate up to this point
Class 1 National Insurance rates
What you pay:
This table shows how much you pay towards your employees’ National Insurance. No change to the rates in 2018 – 19
|2018 to 2019|
|Rate above the Secondary Threshold||13.8%|
|Rate below Upper Secondary Threshold||0%|
|Rate below Apprentice Upper Secondary Threshold||0%|
|Rebate for any employees in contracted-out pension schemes||N/A|
|Rebate for any employees in money-purchase schemes||N/A|
|Class 1A rate on expenses and benefits||13.8%|
What your employees pay:
This table shows how much you deduct from employees’ pay.
|2018 to 2019|
|Between Primary Threshold and Upper Earnings Limit||12%|
|Above Upper Earnings Limit||2%|
|Rebate for employees in contracted-out workplace pension schemes||N/A|
|Married women’s reduced rate between primary threshold and upper earnings limit||5.85%|
|Rate for employees deferring National Insurance||2%|
Check if you need to automatically enrol your staff into a workplace pension scheme.
If you became an employer on or after 1 October 2017, you must enrol all eligible staff into a workplace pension as soon as they start working for you.
You must enrol and make an employer’s contribution for all staff who:
- are aged between 22 and the State Pension age
- earn at least £10,000 a year (£833 per month / £192 per week)
- normally work in the UK (this includes people who are based in the UK but travel abroad for work)
Employees whose earnings are less than £5,876 can still opt in to the pension scheme but they are not entitled to contributions from their employer.
You don’t have to enrol an employee if they give you proof of their lifetime allowance protection which is if their pension pots are worth more than £1 million.
How to set up a pension scheme
You must set up a workplace pension scheme for eligible staff, if you don’t already offer one.
Use the Pensions Regulator’s tool to find out what you need to do and when you need to do it. If you already have a workplace pension scheme that you’d like to use for automatic enrolment, you must ask the provider if it meets the rules.
You must pay at least 1% of your employee’s ‘qualifying earnings from their gross earnings – more than £5,876 a year into your workplace pension. From April 2018 this will rise to 2% in April 2018 and to 3% in April 2019.
In April 2018 this relates to a total pension of 5% for the employee (2.4% as the employee contribution with 0.6% from the government and 2% from the employer).
In April 2019 this will rise to a total pension of 8% for the employee (4% as the employee contribution with 1% from the government and 3% from the employer)
Check the pension scheme you’re using to find out what counts as ‘qualifying earnings’. Under most schemes, it’s the employee’s total earnings between £5,876 and £45,000 a year before tax.
Total earnings include:
- salary or wages
- bonuses and commission
- statutory sick pay
- statutory maternity, paternity or adoption pay
Paying contributions and penalties
You must deduct contributions from your staff’s pay each month. You’ll need to pay these into your staff pension scheme by the 22nd day (19th if you pay by cheque) of the next month.
You must pay your contributions for each employee by the date you’ve agreed with your provider.
You may be fined by the Pensions Regulator if you pay late or don’t pay the minimum contribution for each member of staff. The penalty notice ranges from £50 to £10,000 per day, depending on the number of employees.
Check if you are classed as an employer and need to set up a pension scheme especially if you’re unsure what your duties are, for example if you have a carer or employ someone to work in your home. You’re usually an employer if you deduct tax and National Insurance contributions from an employee’s wages.
Scenarios for forecasting how much an employee will cost you
Scenario 1: Joe
Joe runs a small café and needs staff to cover the busy periods of 10am to 3pm for 7 days a week. He could take on a full time member of staff aged over 25 and working 5 hours a day, for which he does not have to provide a rest break.
(Workers have the right to one uninterrupted 20 minute rest break during their working day, if they work more than 6 hours a day. This could be a tea or lunch break. The break doesn’t have to be paid but it depends on their employment contract.)
- 25 hours X £7.83 (National Minimum Wage from April 2018) = £195.75 per week.
- 13.8% NIC 1 Employers contribution = £27.01 per week
- 2% Employers Pension contribution = £3.92 per week
- Total cost to Joe of this member of staff = £226.68 per week
Scenario 2: Joe
Joe decides to take on 2 part time workers each working 12.5 hours a week as the job can easily be shared.
- 12.5 hours X £7.83 = £95.86 per week
- They are under the NIC threshold and not eligible for the company pension scheme
- Total cost to Joe of these two members of staff = £195.75 per week (annual saving of £1,608.36)
Scenario 3: Bill
Bill runs a small computer repair business and now needs someone to help in repairing IT equipment while he carries out more admin and marketing of the business. Bill believes a fair annual salary would be £17,500.
- 7.5 hours a day X 5 days a week (half an hour unpaid rest break)
- Annual salary = £15,000 per annum
- 13.8% NIC 1 Employers contribution = £2,070 per annum
- 2% Employers Pension contribution = £300 per annum
- Total salary cost to Bill = £17,370
Scenario 4: Bill
If Bill could only afford a total salary of £15,000 he would have to offer:
- Annual salary £13,000
- 13.8% NIC 1 Employers contribution = £1,794 per annum
- 2% Employers contribution = £260 per annum
- Total salary cost to Bill = £15,054
PAYE (Pay As You Earn)
As an employer, you normally have to operate PAYE as part of your payroll. PAYE is HM Revenue and Customs’ (HMRC) system to collect Income Tax and National Insurance from employment.
You don’t need to register for PAYE if none of your employees are paid £113 (£116 from April 2018) or more a week, get expenses and benefits, have another job or get a pension. However, you must keep payroll records.
What payments and deductions do you need to make?
When paying your employees through payroll you also need to make deductions for PAYE.
Payments to your employees
Payments to your employees include their salary or wages, as well as things like any tips or bonuses, or statutory sick or maternity pay.
Deductions from their pay
From these payments, you’ll need to deduct tax and National Insurance for most employees. Other deductions you may need to make include student loan repayments or pension contributions. HMRC can guide you through this.
If you run payroll yourself, you’ll need to report your employees’ payments and deductions to HMRC on or before each payday.
Your payroll software will work out how much tax and National Insurance you owe, including an employer’s National Insurance contribution on each employee’s earnings above £157 a week.
You’ll need to send another report to claim any reduction on what you owe HMRC, for example for statutory pay.
You’ll be able to view what you owe HMRC, based on your reports. You then have to pay them, usually every month.
If you’re a small employer that expects to pay less than £1,500 a month, you can arrange to pay quarterly.
Other things to report
You have to run annual reports at the end of the tax year, including telling HMRC about any expenses or benefits.
If you decide to run payroll yourself, you need payroll software to report to HM Revenue and Customs (HMRC). The software will help you with tasks like:
- recording your employees’ details
- working out your employees’ pay and deductions
- reporting payroll information to HMRC
- working out how much you need to pay HMRC
- calculating statutory pay, for example maternity or sick pay
HMRC tests payroll software to check it can report PAYE information online and in real time (RTI).
You should consider which features you need. For example, some software won’t let you:
- produce pay slips
- record pension deductions
- make pension payments
- pay different people over different periods (for example both weekly and monthly)
- send an Employer Payment Summary (EPS) report or Earlier Year Update (EYU) to HMRC
HMRC can’t recommend one software product or service over another and isn’t responsible for any problems you have with software that you’ve bought.
Registering as an employer
You normally need to register as an employer with HM Revenue and Customs (HMRC) when you start employing staff, or using subcontractors for construction work.
You must register if you’re employing yourself, for example as the only director of a limited company as you are technically an employee of your business.
You must register at least 2 weeks before their first payday but not more than 2 months before you start paying people.
Most new employers can register online. It is important to allow plenty of time because it can take up to two weeks for a PAYE reference number and the activation code for PAYE online to arrive.
However, you shouldn’t register more than 120 days ahead of the first payday. This is because if you don’t file anything with HMRC within 120 days, your PAYE scheme will be cancelled automatically. Find out whether you need to register and how to do it.
It doesn’t all end there. You also have to check that your employee is entitled to work in the UK and then make sure you are following employment law and procedures.
You should conduct right to work checks on all potential employees. This means you should ask all people you are considering employing to provide you with their documents. To ensure that you do not discriminate against anyone, you should treat all job applicants in the same way at each stage of your recruitment processes.
You should not make assumptions about a person’s right to work in the UK or their immigration status on the basis of their colour, nationality, ethnic or national origins, accent or length of time they have been resident in the UK.
It is the employer’s responsibility to check on the right to work in the UK. The penalty for employing illegal workers could be up to 5 years in prison and an unlimited fine.
Criminal record checks
Employers can only check the criminal record of someone applying for certain roles, for example in healthcare or childcare where an enhanced check may be required.
This is known as getting a Disclosure and Barring Service (DBS) check.
You can’t carry out a basic check as an organisation, instead you must ask the person to request their own basic DBS check.
A basic check shows unspent convictions and cautions, although some types of caution will disappear after 3 months. There is a cost to the individual applicant of £25.
A DBS check has no official expiry date. Any information included will be accurate at the time the check was carried out. It’s up to you to decide when a new check is needed.
DBS checks won’t cover the time someone lived outside the UK.
types of DBS check
There are 3 types of check you can carry out as an organisation:
- a standard check shows spent and unspent convictions, cautions, reprimands and final warnings
- an enhanced check shows the same as a standard check plus any information held by local police that’s considered relevant to the role
- an enhanced check with barred lists shows the same as an enhanced check plus whether the applicant is on the list of people barred from doing the role
If you carry out criminal records checks, you must have a policy on employing ex-offenders and show it to any applicant who asks for it.
Employers liability insurance
You must get Employers’ Liability (EL) insurance as soon as you become an employer. Your policy must cover you for at least £5 million and come from an authorised insurer.
It will help you pay compensation if an employee is injured or becomes ill because of the work they do for you. You may not need EL insurance if you only employ a family member or someone who is based abroad.
You can be fined £2,500 every day you are not properly insured. You can also be fined £1,000 if you do not display your EL certificate or refuse to make it available to inspectors when they ask.
Send details of the job (including terms and conditions) in writing to your employee. You need to give your employee a written statement of employment if you’re employing someone for more than 1 month.
Written statement of employment particulars
An employer must give employees a ‘written statement of employment particulars’ if their employment contract lasts at least a month or more. This isn’t an employment contract but will include the main conditions of employment.
The employer must provide the written statement within 2 months of the start of employment.
It’s very important to bear in mind the actual, final cost to your business when hiring an employee rather than just the salary you are offering.
Remember the other unseen costs of National Insurance contributions, employer’s liability insurance, payroll systems, pensions and expenses. All of these things have to be funded from somewhere.
With this information to hand you can now make an informed decision as to whether you can afford to bring on an extra pair of hands.
An employee should be earning their salary and ideally fifty percent more in increased sales, although it may take time for them to work up to this.
Above all, stay positive and well informed. Although the red tape of employment seems cumbersome, do remember that once it is set up it should only be maintenance of the system from there.
You’ll soon be ready to take on your first employee to move your business forward.