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

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.

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.

Personal Allowance is how much an employee can earn before they are taxed.

The amount of Income Tax deducted from an employee’s earnings is determined by how much over the Personal Allowance threshold they earn and how much of their income falls within each tax band. Some of their income will be tax-free.

The Personal Allowance for most employees is £12,570 for 2024/25, but it will be slightly higher if your employee is claiming Marriage Allowance or Blind Person’s Allowance. It is lower if an employee earns more than £100,000 a year (employees do not get a Personal Allowance on taxable income of more than £125,000).

Employees who earn between £12,571 and £50,270 pay the 20% Basic Rate of Income Tax, while those earning between £50,271 and £122,570 a year pay the 40% Higher Rate of income tax. The Additional Rate of Income tax of 45% is payable on earnings of more than £122,570. Allowance and reliefs may also be claimed.

Visit GOV.UK for more about Income Tax rates and Personal Allowances.

As explained on The Pensions Regulator website: “Under the Pensions Act 2008, every employer in the UK must put certain staff into a workplace pension scheme and contribute towards it. This is called ‘automatic enrolment’.” Failure to comply with these legal duties can lead to fines.

Basically, a percentage of an employee’s pay is put into a chosen pension scheme automatically each payday, with employers also having to contribute. The employee may also benefit from tax relief. Employees must contribute 5% of their earnings, with employers having to contribute 3%.

The Pensions Regulator website offers advice about auto-enrolment for those starting a business, as well as information for employers about ongoing duties.

Adding up all of the above will tell you how much your new employee will earn and what amounts you’ll need to deduct from their earnings. PAYE software makes this task quick and easy, while it also enables you (or your service provider) to report PAYE information to HMRC in “real-time” when you pay staff, which is a requirement.

If you get someone else to take care of your payroll, whether a bookkeeper, accountant or other service provider, obviously, you’ll have to pay them a monthly fee, but it could save you much time and effort. You’ll also have to pay your employer NICs, of course, which should be built into your calculations when working out all of the costs created by taking on staff. 

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

There are a number of other costs to consider when hiring staff for your business. 

• Recruitment costs: The cost of the whole recruitment process is open to debate. It’s fair to say it can be expensive – from £3,000 per employee (Source: Glassdoor) to as much as £12,000 (Source: Accounts & Legal) when factoring in the various tasks that need to be fulfilled. Those tasks include creating the job ad, advertising the role, interviewing the candidate and onboarding the new staff member. If you use a recruitment agency, they will also take a fee (usually between 15% and 20% of the annual salary)
• Employer’s liability insurance: It’s a legal necessity to have this insurance if you employ staff. According to GOV.UK: “EL insurance will help you pay compensation if an employee is injured or becomes ill because of the work they do for you.” How much your policy costs will depend on the number of employees and the nature of your business. 
• Criminal record checks: Some businesses may need to carry out a criminal record check on the employee. The cost of doing a basic check is £23 with a possible administration fee on top. 
• Membership fees: If the new staff member is part of a membership body, it may be expected that the business covers this cost – if it is relevant to their role. These costs will range from £100 a year to £500 depending on the body.