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  1. 1. What does it cost to hire an employee?

What does it cost to hire an employee?

October 1, 2021
Whether you're expanding your business or have recently registered as a limited company, you're probably looking to grow your workforce. Regardless of your situation, hiring new employees can be an exciting and somewhat challenging task.  The cost of hiring isn't the only expense you'll have to pay out for when hiring new employees. From small businesses to mid-sized companies, there are legal requirements that must be followed when hiring employees, from National Insurance contributions to Statutory Sick Pay. Sometimes the true cost of recruiting isn't obvious until you're deep into the recruitment search. In this article, we'll give you a run-through of what costs you can expect when you hire a new employee, from the initial recruitment search through to onboarding.

What does it cost to hire an employee?

Hiring an employee costs even before you've met any candidates. Through the cost of posting job descriptions, doing background checks and looking at resumes, the average UK company spends around £3,000 on recruitment costs alone.While the talent acquisition process may be long and expensive, the hiring costs are ultimately worth it when it comes to finding the top talent for the role. It's important to find someone with the flair and commitment to learn and grow in their role, as well as bring their previous expertise and experience to the company.Before you even begin sifting through candidate resumes, however, there are a number of things you need to take care of beforehand, from managing your legal obligations as an employer, to settling on a salary and deciding on the employee benefits you plan on offering to minimise employee turnover.

Register as an employer

One of the first things that you need to do when starting a limited company is register with HMRC (Her Majesty's Revenue and Customs) as an employer. This is a fairly straightforward process, and can be done by filling out a form on the HMRC website before your company's first payday. However, you cannot register as an employer more than two months before you start paying yourself or your employees. At least one company director will need to have a National Insurance number to register your business. Don't forget to have your Government Gateway login details on hand, as you'll need this information to use HMRC online services.You need to register as an employer in order to set up PAYE for your employees. This will allow you to pay taxes and National Insurance for your staff. Using our in-app payroll system, you can add new employees to your company's payroll and see the breakdown of their salary, as well as taxes such as PAYE and National Insurance contributions.

Conduct DBS checks

Certain job roles will require a DBS (Disclosure and Barring Service) check. This is a system to find out whether a potential employee is suitable to work around individuals such as children and vulnerable adults, as well as work with sensitive material.Job roles that legally require a DBS check include teachers, solicitors and medical professionals. According to the government website, you can't request a DBS check on every employee as the check can only be carried out on eligible employees in certain roles. Before completing an application on behalf of an employee, you will need to check that the role they are applying for qualifies for a DBS check. A standard DBS check costs £23, whereas an enhanced check costs £40. Although there's no legal requirement for you as the employer to pay, it is generally accepted that the company rather than the employee pays for DBS checks, so it's good to make sure you have a small amount of money set aside, just in case.

How much is minimum wage?

Employees are legally required to earn a minimum amount per hour, depending on their age. For example, employees aged 23 years or over must earn over the National Living Wage, which is currently set at £8.91. Employees younger than 23 are entitled to the National Minimum Wage, which is lower than the National Living Wage, but depending on the role you may want to consider paying them more to minimise employee turnover.
AgeEntitlementMinimum amount
ApprenticeNational Minimum Wage£4.30
Under 18National Minimum Wage£4.62
18 to 20 years oldNational Minimum Wage£6.56
21 to 22 years oldNational Minimum Wage£8.36
23 years old or overNational Living Wage£8.91
The rates shown in the table are not set in stone and are subject to change on 1 April every year. Your company is obliged to change your employees' wages if the National Minimum or Living Wage changes.

What is cost per hire?

Aside from being a lengthy process, hiring new employees can also be costly. Cost per hire is a breakdown amount of how much it has cost your company to advertise, interview and select an employee for each role. It also covers the cost of in-house background checks, recruitment days and training costs. 

How should I pay my employee?

It's up to you to decide how you pay your employees. Whichever method you decide on will have to be previously discussed with the employee so that they know when they will be paid. Below are some methods that can be used to pay your staff:
    Paid by the hour: this method means that your employees will get their wages based on how many hours they have worked. Overtime should be discussed so that your employees know how much they will earn.Annual salary: employees will be contracted to earn a certain amount and will have a minimum amount of hours on their contract that they need to earn it. Paid by the piece: this is where employees are paid by how many tasks they have completed or items they have made.Commission: employees may be paid commission in addition to their normal salary if they secure a sale. This is used as an incentive for the individual to make more sales. This typically applies to recruitment and sales teams, so if you're hiring for such a role, you'll need to consider what your commission structure will look like.
Working time (the time that you pay your employees for) is usually classed as when the employee is at work and completing tasks, as well as time spent training, collecting goods or travelling in connection to work.Your company doesn't have to pay employees for the time it takes them to commute between home and work.

What are employee entitlements?

Every employee has legal rights when it comes to working. Although you can decide on certain arrangements, the government has set minimum requirements that every company needs to follow.

Holiday

Employees are eligible for a minimum statutory holiday of at least 5.6 weeks. This will equate to around 28 days for full-time workers. Part-time employees are also allowed 5.6 weeks holiday, although the number of specific days will vary depending on how much they work. For example, if an employee only works 2 days, 5.6 weeks of holiday would equal 11.2 days annually (2 x 5.6). You can choose to offer more than the minimum holiday allowance.

Rest breaks 

Employees that work more than 6 hours are entitled to a 20-minute uninterrupted break from work. The rest periods can be unpaid and you can offer more than the minimum legal break.You must allow over 11 hours between employees' working days and you can't force them to work more than 48 hours per week. However, employees can choose to work more than 48 hours a week if they want. 

Statutory leave

Why do I need employment insurance?

It is a legal requirement that all employers must have Employers’ Liability (EL) insurance. This will help you pay legal fees and compensation claims if an employee is injured or falls sick as a result of their work. The insurance must cover you for at least £5 million. If you do not have the correct insurance, you will be fined £2,500 every day until you are insured. In addition, you must display the EL certificate in your place of business or make it available to inspectors upon request. If you fail to do so, you can be fined £1,000.

Do I have to contribute to my employee's pension?

Due to a recent change in the law, all employers have to provide a pension scheme as soon as the first employer starts. Employers aged 22 years to state pension age and earning over £10,000 a year are automatically enrolled in your company's pension scheme. They must also live in the UK – employees that travel are still eligible for the pension scheme as long as they're based in the UK. Those aged under 22 years can choose to opt-in manually. To do this, they must earn £6,240 or more a year and specifically ask in writing to be added to the scheme.Workplace pensions are worked out based on how much the employee earns and how long they've worked for your company. A percentage of the employee's salary is automatically put into the pension scheme at each payday. You will also contribute a percentage of the employee's wage to the pension pot. The legal minimum amount that you must contribute to your employee's pension is 3% per month. The average contribution is usually 3% by employers and 5% from employees. However, you can decide to contribute more than 3%, in which case your employee can pay a smaller percentage. Bringing on a new hire might seem expensive, especially when you're only hiring a single employee at a time, but it is a worthy investment. With the right people on board, you can boost employee retention, boost sales and skyrocket your company's growth.
Aaron Shaw
Aaron Shawco-founder & co-CEO

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