Employing staff – how much does it cost to employ someone?

What is PAYE?

If you employ staff, you’ll normally need to operate PAYE (Pay As You Earn) as part of your payroll. PAYE is HMRC’s system for collecting Income Tax and National Insurance from employment.

You’ll normally need to register as an employer with HMRC, use payroll software to calculate pay and deductions and report payroll information to HMRC. You’ll also need to provide employees with a payslip showing their pay and deductions.

Income Tax and employee National Insurance are generally deducted from the employee’s pay, so they aren’t additional employment costs for your business. However, you may have your own costs associated with running payroll, such as payroll software or paying a payroll provider, bookkeeper or accountant.

Even where you don’t need to operate PAYE, you may still need to keep payroll records.

How does National Insurance affect the cost of employing someone?

Both employees and employers may have to pay Class 1 National Insurance contributions (NICs) on an employee’s earnings.

Employee National Insurance is deducted from the employee’s pay through payroll and paid to HMRC. This doesn’t normally represent an additional cost to your business.

Employer National Insurance, however, is paid by your business in addition to the employee’s gross pay. This means it needs to be included when you calculate the overall cost of employing someone.

The amount of employer National Insurance due depends on factors including the employee’s earnings and National Insurance category. Different rules or reliefs can apply to some employees, including certain younger employees, apprentices and veterans.

If your business is eligible, you may be able to claim the Employment Allowance, which reduces the amount of employer Class 1 National Insurance you need to pay. This can reduce the overall cost of employing staff. Eligibility depends on your circumstances and some businesses and employers cannot claim. The allowance is claimed through your payroll, so check the current eligibility rules and allowance available when calculating your employment costs.

Do I pay my employees’ Income Tax?

No. Income Tax deducted through PAYE is taken from the employee’s gross pay rather than being an additional cost to your business.

The amount deducted will depend on the employee’s taxable pay and tax code. Their tax code tells your payroll system how much tax-free income they’re entitled to when calculating their Income Tax deductions.

Income Tax rates and allowances can change, and different rates and bands apply in Scotland. Your payroll software will normally calculate the amount to deduct using the information provided by HMRC.

Visit GOV.UK to check the current Income Tax rates and Personal Allowances.

How much will I need to contribute to a workplace pension?

If you employ staff, you’ll have workplace pension automatic enrolment duties from the date your first member of staff starts work.

You’ll need to assess your employees to identify who must be automatically enrolled into a workplace pension scheme. Other employees may have the right to ask to join or opt into the scheme.

Where an eligible employee is enrolled, both the employee and employer normally contribute to their pension. Your employer contribution is an additional cost on top of the employee’s pay. Minimum contributions are generally calculated using a band of an employee’s earnings known as qualifying earnings, although some pension schemes calculate contributions differently. You can choose to contribute more than the statutory minimum.

You’ll normally use your payroll process to calculate pension contributions and provide the required information to your pension provider.

Automatic enrolment also brings ongoing responsibilities, including monitoring employees’ eligibility and completing a re-declaration of compliance when required.

What are the costs of running payroll?

You’ll need a way to calculate your employees’ pay and deductions and report payroll information to HMRC.

You can run payroll yourself using suitable payroll software or pay a payroll provider, bookkeeper or accountant to do it for you. Depending on the option you choose, you may therefore need to budget for software or professional fees.

Payroll administration also takes time. You’ll need to maintain payroll records, provide payslips, make payments to employees and HMRC and complete the required payroll reporting.

Remember that amounts such as Income Tax, employee National Insurance and student loan repayments are normally deducted from the employee’s pay. They aren’t additional payroll costs to your business. Employer National Insurance and employer workplace pension contributions, however, are additional employment costs.

GOV.UK offers advice for employers on payroll software. Also read our guide to operating payroll.

What other costs should I budget for when employing staff?

Salary or wages, employer National Insurance and pension contributions aren’t the only costs to consider. Depending on the employee and your business, you may also need to budget for:

• Recruitment: advertising vacancies, recruitment agency fees, interviewing candidates and the time spent recruiting.
• Training and onboarding: induction, job-specific training and the time other employees spend helping a new starter.
• Paid holiday: most workers are legally entitled to paid annual leave, so you’ll need to budget for holiday pay as part of your employment costs.
• Sickness and family-related leave: employees may qualify for statutory payments or paid leave, depending on the circumstances. Some statutory payments may be recoverable from HMRC in whole or in part.
• Employers’ liability insurance: most employers are legally required to have employers’ liability insurance and must have cover of at least £5 million from an authorised insurer.
• Workplace equipment: you may need to provide a computer, phone, tools, protective equipment, uniform, furniture or other equipment required for the job.
• Workplace costs: an additional employee may increase costs such as premises, utilities, software licences and other subscriptions.
• Pre-employment checks: some roles require checks such as a DBS check or other suitability checks. Employers must also carry out the appropriate right to work check before employing someone.
• Employee benefits: your business may choose to provide additional benefits such as enhanced pension contributions, private healthcare or other benefits.
• Professional subscriptions: you may choose to pay relevant professional membership fees required or useful for an employee’s role.

So, when deciding whether you can afford to employ someone, don’t look at their salary alone. Estimate their total employment cost, including employer National Insurance and pension contributions, recruitment and payroll costs, paid leave, equipment and any benefits you plan to provide.