Clients frequently ask how much they need to budget for additional employment costs (by which they generally mean National Insurance and pension contributions) above and beyond the gross salary they’re going to be paying an employee. When creating financial projections, we tend (depending on the purpose of the projections and the level of accuracy merited) to default to 10%. In real life, though, it does depend upon how your workforce is made up.
With your first employee, the best answer is often “very little - it needn’t inform any decision making”. That’s because, at present, the Employment Allowance means that almost all employers are excused from paying the first £4,000 of Employer’s National Insurance. If you make your first hire, and they’re paid £35,000, say - the NI is covered in full, nothing for you to pay on top. You’ll end up needing to operate a pension scheme in due course, but annual employer contributions will be less than £1,000 under a standard setup. There’s going to be a bit of cost in getting the payroll processed and the pension set up of course, and you’d be wise to pay someone to help you get the HR and contracts side of things set up properly, but the additional costs at this point shouldn’t really make any difference to a sensible business owner.
Once the Employment Allowance is used up, the costs are more meaningful. Because National Insurance only kicks in on income over £9,000, and pension contributions are generally only calculated on income over £6,000, for relatively low-paid part-time staff, additional costs are minimal - for someone on £10,000, NI and pension contributions add less than 3%. But if someone is on £20,000 the additional costs are about 10%. By the time they’re on £40,000 the additional costs are just under 14%. They don’t get any higher than that. So if you wanted a “worst case” number, go with 14%. But you can see how important the make-up of the workforce is, and why 10% is generally fine for projections.
None of this is intended to deter anyone from employing staff! The extra costs are a fact of life, and generally a robust and successful business will take them in its stride, and won’t try to play fast and loose with employment law and pretend that employees aren’t really employees in order to avoid them - if a business can’t be successful within the rules that’s generally a problem with the business, not the rules. At the same time, though, it’s a really smart thing to think about and budget for.
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