Hiring your first employee is a big milestone for your business, but it’s something you can’t afford to rush into. Weighing up the costs associated with hiring an employee helps you make an informed decision. 

Making the leap from solo business owner to employer is a tricky one. As soon as you hire an employee, things become more serious – you have wages to pay every week or month and ultimately, that person is relying on you to help them pay their bills!

There are lots of hidden costs associated with hiring an employee, many of which depend on your business and your approach. For example, if you need to equip your new hire with specialist tools or machinery, your costs will naturally be higher. 

Other costs depend on your approach to hiring – advertising on a Jobs board like Indeed will be fairly cheap, but using a recruitment consultant can cost as much as 20-30% of the employee’s salary. 

To help you decide if hiring an employee is worth it for your business, we’ll look at fixed costs such as salaries and National Insurance contributions, since they’re not unique to a specific type of business or recruitment approach. 

Bear that in mind as you read through this guide, as you might need to keep some budget aside for equipment, recruitment, training or anything else associated with getting a new hire up to speed. 

The fixed costs associated with hiring an employee

The fixed costs of hiring an employee are the best way to help you work out if hiring fits into your budget. As an employer, you’ll be responsible for the following regular costs for each employee you hire:

• Salaries
• 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 2024/25 tax year, with a minimum of 3% coming from the employer and the balance from the employee
• Employees' 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)

Employee costs at-a-glance

The bulk of your payments are going to be employee salaries – but this varies heavily based on your employee’s age and skills. The minimum you can legally pay is defined by the government’s National Living Wage (or National Minimum Wage for those of school-leaving age). You may also choose to pay salaries according to the voluntary ‘real Living Wage’.

* 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 based on 3% Employer’s contribution (total 8% contribution split 5% staff and 3% employer on earnings above the above the lower earnings threshold, currently £6,240).

As you can see from the chart, even minimum salaries can quickly eat into your business’ profit so you need to make sure it’s a financially viable move before you commit to hiring staff. Remember that the employment allowance is there to help mitigate some of the costs. 

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:

• Holiday pay (including bank holidays) - UK holiday entitlement means you’ll need to budget for almost 6 week’s worth of a salary to provide holiday pay. 
• Sick pay - you’ll have to pay eligible employees £99.35 per week for 28 weeks if they claim SSP. 
• Maternity/Paternity pay - you’ll need to pay this for up to 52 weeks, so make sure you plan ahead. 

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.

Manage employee costs more accurately with Crunch

If you’re hiring your first employee, you probably don’t have a payroll system in place beyond whatever you use to draw your own salary. As soon as you’re responsible for someone else’s wages and all of the tax obligations that come with it, you’ll need a payroll system to stay on top of your obligations. 

Try Crunch today to see how our HMRC approved payroll system makes it simple and cost-effective to manage your employee salaries.

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