Understanding the costs of employment

You must pay workers at least the legal minimum. This is called the:

• National Minimum Wage for workers aged 20 and under
• National Living Wage for workers aged 21 and over

When working out what pay and benefits package to offer to candidates:

• check job ads to see what employers in your area pay for similar roles
• think about any benefits you will offer, on top of basic salary, and how much these will cost you
• check your finances to see what you can comfortably afford to pay once you add National Insurance, pension contributions, holiday pay, sick pay and any benefits to the basic salary

Employer’s National Insurance Contribution (NIC) is a tax you pay on employee wages. It is a cost to your business, not something you deduct from employee wages.

You pay 15% of the amount that your employee earns above these income thresholds:

• £96 if paid weekly
• £192 if paid fortnightly
• £417 if paid monthly

You pay less or no NICs for employees who are:

• under 21
• under 25 and an apprentice
• in the first 12 months of their first civilian job after leaving the armed forces

Employment Allowance

Employment Allowance is a tax relief that reduces your National Insurance Contributions by up to £10,500. Use your payroll software to apply this relief or use HMRC’s Basic PAYE Tools.

Workplace pension contributions add to the cost of having an employee. You must offer all employees access to a workplace pension and must automatically enrol eligible employees.

The costs of your workplace pension include:

• contributing at least 3% of each employee’s qualifying earnings to their pension
• any administration or management costs charged by the pension provider

You will have pension responsibilities even if you only hire seasonal employees or have employees who earn below the thresholds.

All workers in the UK are entitled to paid holiday leave each year.

The amount of paid leave someone gets depends on their working patterns and on your business’s leave policy, but it is a minimum of 28 days a year for people who work a 5-day week.

You must pay statutory sick pay to eligible employees. Your employees are entitled to sick pay from the first day they are off work sick, as long as:

• they’ve already started working for you
• they tell you that they are too sick to work within 7 days or whatever other deadline you set in your sickness policy

Statutory sick pay is the lower of:

• £123.25 per week
• 80% of the person’s average weekly earnings

You can ask the employee to provide you with a fit note from a medical professional if they are off for more than 7 days in a row. If you agree, the employee can give you another appropriate form of evidence instead of a fit note.

You are responsible for paying certain statutory payments to employees, including different types of parental leave.

You can reclaim some of these costs from the government. The amount you can reclaim depends on how much your business paid in Class 1 National Insurance contributions in the last complete tax year.

There are hidden costs associated with employing someone. You will need to budget for:

• insurance – you are legally required to have employer’s liability insurance and may need other cover depending on what your employees do
• recruitment – both financial and time costs
• the time and cost of training the person
• equipment, software or licences you need to provide to workers

Government provides businesses with some help towards employment costs. This includes:

• incentives to hire young people or people who are in receipt of benefits
• funding to hire and train apprentices
• Employment Allowance, which reduces your employer’s National Insurance bill