Hiring a new employee is not a decision to be taken lightly. The cost of training, employment and pension are all factors you need to consider when hiring staff. In this blog, we look at the costs of hiring an employee in the UK and how they vary depending on their skill set as well as the industry. We also look at what each employer’s responsibilities are when it comes to paying people fairly, including holiday pay entitlements and pensions schemes.
The national minimum wage (NMW) vs the national living wage (NLW)
If you’re looking to hire an employee, you need to know about the national minimum wage (NMW) and the national living wage (NLW). It’s a legal requirement for employers across the UK to pay their workers at least this amount per hour — but it can be tricky to understand how many employees are included in this law and what exactly they should be paid.
The national minimum wage (NMW) applies to almost all workers whereas the National Living Wage (NLW) applies to workers over 23 years old. Some types of workers such as self-employed people, company directors or volunteers are not entitled to the national minimum wage. You could find a list of these exemptions on the government’s website at https://www.gov.uk/national-minimum-wage/who-gets-the-minimum-wage#:~:text=The%20following%20types%20of%20workers,are%20volunteers%20or%20voluntary%20workers. In addition, there are different rules if your business employs apprentices, or employees aged under 18 years old and school students aged 18–20 years old. So, how much does it cost?
The current national minimum wage rate is set at GBP 9.18 per hour for employees aged 21–22 in 2022/2023, GBP 6.83 for employees aged 18–20 and GBP 4.81 per hour for those under 18 and apprentices under 19 and those aged 19 or over and in the first year of their apprenticeship.
The current living wage is currently set at GBP 9.50 per hour for employees aged 23 and over.
Updated rates could be found on the government website: https://www.gov.uk/national-minimum-wage-rates
The real living wage
Some businesses choose to pay more than the NMW — particularly in places with a higher cost of living such as London. This is known as the real living wage.
The real living wage differs from the government-mandated amount because it takes into account regional variations in the cost of living and hours worked per week; it also considers individual circumstances such as experience level and responsibilities when determining a fair hourly rate of pay for each employee.
There are several websites that can help you determine what an appropriate hourly rate might be for your business based on these factors:
Employer national insurance contributions (NICs)
Employer national insurance contributions (NICs) are a legal requirement in the UK. The amount of NICs you pay depends on your business structure, but most businesses will have to pay at least 15.05% of their employees’ wages as payroll tax for salaries exceeding GBP 758 per month.
The national insurance contributions rate is split into five classes:
· Class 1: paid by employees earning more than £190 a week and under State Pension age and is automatically deducted by the employer;
· Class 1A 1B: paid by the employer on its employees’ expenses and benefits;
· Class 2: paid by self-employed people earning £6,725 or more a year.
· Class 3: paid by those exempt from NICs wishing to make a voluntary contribution to fill or avoid gaps in their National Insurance record;
· Class 4: paid by self-employed people earning £9,881 or more a year
Eligible employers could reduce their annual National Insurance liability by up to £5,000 (for 2022/2023) per payroll period (running from the 6th of April until the 5th of April the following year). This is known as the employment allowance. The employment allowance is available for businesses with Class 1 National Insurance liabilities less than £100,000 in the previous tax year.
More information could be found on the applicable rates on the government website at: https://www.gov.uk/government/publications/rates-and-allowances-national-insurance-contributions/rates-and-allowances-national-insurance-contributions
Pension scheme costs
They are two types of pension schemes in the UK:
· Auto-enrolment or automatic enrolment is a scheme that requires all employers hiring at least one employee aged between 22 and the State Pension age and earning at least GBP 10,000 a year in the UK to set up a pension arrangement for their employees. It’s referred to as “auto” because it is compulsory for employers to offer, however, employees have the choice whether to participate or not. Employers can choose their own provider .The minimum employer contribution rate is set at 3% for staff’s earnings between £6,240 and £50,270 a year for the 2022/23 tax year. Pension scheme providers could also apply a monthly membership fee. The employer must declare its compliance with The Pension Regulator (TPR) within 5 months after its duties start. More information could be found on the TPR’s website: https://www.thepensionsregulator.gov.uk/en/employers/new-employers/im-an-employer-who-has-to-provide-a-pension
· Voluntary schemes are those that companies create themselves, without being required by law. Employees can opt into these plans if they wish; however, they may be more expensive than auto-enrolled ones since they require additional administrative work by both yourself and your chosen provider.
Cost of running PAYE
Pay As You Earn (PAYE) is the term used to describe the payment of tax and National Insurance contributions by an employer in the UK.
· When you pay someone a salary or wage, you deduct tax and National Insurance from their pay packet before paying it out to them. You then report this information to the tax office called HMRC using their ‘PAYE’ service.
· The cost of running PAYE varies from employer to employer, depending on how many employees you have and what type of work they do (there are different rates for salaried workers vs zero-hour contract workers).
Employer liability insurance
Employer liability insurance is required by law for any business hiring employees. This is because an employer is liable for any injuries sustained at work or during the course of their employment.
If you’re new to hiring employees, you may not be aware of this requirement and will need to take out a policy before you can hire anyone. Buying this insurance covers you against legal liability in case one of your staff members gets hurt while they’re working for you or because of their work environment (for example, if there’s faulty equipment).
Statutory Holiday Pay is paid by law and includes bank holidays, Christmas Day, Good Friday, Easter Monday and days designated as national/statutory holidays in England and Wales (Scotland has its own list).
It doesn’t include additional public or local holiday days. You’re legally required to give employees at least 28 days of statutory holiday annually — which works out to 5.6 weeks of paid leave per year (assuming eight public holidays) when you don’t take into account any other time off you grant them during the year.
Statutory Holiday Pay is also limited to 28 days, which means that employees working more than 5 days a week are only entitled to 28 days of paid holiday.
Employers may choose to offer more leave than the legal minimum. Although they could include the eight public holidays in the 28 days holiday allowance, most of them decide to offer 25 days off plus bank holidays. There is also a new trend of not setting a number of holidays per year, which means that employees could theoretically take as many paid holidays as they want.
Sick pay and maternity/paternity leave
Statutory Sick Pay (SSP) is an employee benefit that allows them to receive a percentage of their salary if they are ill. Employees are entitled to GBP 99.35 per week of Statutory Sick Pay for up to 28 weeks. The employer’s policy/contract may provide a higher amount.
Statutory Maternity Pay (SMP) is another employee benefit that allows women to take time off work after giving birth or fostering a child, without losing their job or any pay. SMP is paid for up to 39 weeks, at 90% of the employee’s average earnings (before tax) for the first 6 weeks and the lowest between 90% of the employee’s average weekly earnings or GBP 156.66 for the next 33 weeks.
Statutory Paternity Pay (SPP) allows men to take up to two weeks off work with either 90% of the employee’s average weekly earnings or GBP 156.66 (whichever is lower).
Employers could reclaim 92% of employees’ SMP, Paternity, Adoption and Shared Parental Pay.
Small employers could qualify for small employers’ relief and reclaim up to 103% if they pay £45,000 or less in Class 1 National Insurance.
Although employers are only required to pay the SMP or SPP, most of them decide to offer more.
In certain industries, such as construction and manufacturing, it might be possible for employers who have liability insurance policies (which cover their workers’ compensation claims) to use this, instead of providing sick pay benefits themselves. This can be done through insurance companies such as WCIC — Workers’ Compensation Insurance Company Limited. But, this only makes sense for businesses that face higher rates of injury than others!
There are other costs to take into consideration while hiring your new employees such as the recruitment cost, cost of training or equipment or the cost of perks which will vary depending on your industry and budget.
Hopefully, we’ve given you a good idea of how much it costs to hire a new employee in the UK. Regardless of your organisation’s size, there are plenty of factors that can affect the final figure. However, as long as you have planned ahead and budgeted accordingly for these costs then there shouldn’t be any surprises along the way! Good luck with your hiring process!
Did you know that operviser ltd can help you hire your new employees, register your PAYE with HMRC and set up your payroll? For more information visit our website at www.operviser.com or contact our team at firstname.lastname@example.org.