The real cost of taking on your first employee

Taking on your first employee should be an exciting time. It means your business idea is working and you need help to expand. But while employees will help your business grow, they will also bring new stresses you may not have encountered before.

When you are employing new staff, there are all sorts of costs that you must take into account. Plus the way your business runs with just you and any business partner, may not continue to be appropriate when employees are on board.

This guide will help you identify the true costs of an employee, and build a plan to manage the impact on your business.

Recruitment

Advertising for staff is incredibly expensive. Local papers charge more for recruitment adverts than any other advertising. And a recruitment agency could ask for up to 20% of your employee’s first year salary to find the right person for you.

If you want to avoid laying out any cash on recruiting you can post your needs on social media. Specialist social media sites for businesses, such as LinkedIn can be used to research and track down potential employees quite successfully.

There are many laws covering recruiting and employing people, especially focusing on equal opportunities. For more information on this area, read;

• ByteStart’s guide to the basics of taking on employees.

Salary

Their salary will be the biggest single cost of a new employee. To minimise the financial impact, many businesses start with part-time help, or employ someone on a fixed term contract. That’s fine, although it can sometimes be harder to find the right person who’s willing to work part-time.

If you are considering this option, be aware that as your business gets bigger, your employee might not be able to, or want to work more hours, meaning you are forced to recruit someone else.

Your employee will expect their salary in full, on a fixed date each month. You won’t be able reduce how much you give them if it’s been a quiet month!

It’s worth looking back at your cash flow over the last year and trying to predict your workload for the next 12 months. It’s you that will take a financial hit if the work drops off, not your employee.

National Insurance and income tax

As the employer, you are responsible for complying with a number of laws and ensuring income tax and National Insurance is paid for your new employee. Failure to do so could lead to penalties.

Each month it’s your responsibility as the employer, that the correct PAYE income tax and National Insurance deductions are made. You also have to pay employer’s National Insurance for your employee. For more information on this read –

• ByteStart’s Guide to National Insurance for Small Businesses and

• An Overview of the Pay as You Earn (PAYE) scheme.

Many accountants and book-keepers offer a payroll service, where they will sort all of the paperwork, make the relevant income tax and National Insurance deductions and provide a salary slip for your employee.

This is generally a very worthwhile investment as for a relatively small fee it will ensure you stay legal and allow you to focus on the more productive and interesting parts of running your own business.

Employers Liability Insurance

As soon as you take on any staff, even just casual part-timers, it is compulsory to get employer’s liability insurance, which protects your staff if they are injured or fall ill as a result of working for you.

Your insurance must be at least £5 million; most insurers offer a basic £10 million cover. The fines for not having the insurance are staggering – they can be up to £2,500 a day.

It’s also possible to get insurance to cover your business in the event of any legal claims by your employee, for example if they are alleging unfair dismissal.

While you are sorting out the employer’s liability insurance, it’s worth ensuring your business is protected with public liability insurance, and any other insurance related to what you do, such as professional indemnity insurance as many insurance companies will offer a single package that includes all the cover you need.

Sickness, maternity and flexible working

Your employee will have rights – lots of them. You will be paying them at least the National Minimum Wage, money if they are off sick, when they have holidays and if they have a baby.

From June 2014, all employees have the right to ask to work flexibly, so make sure you know about these latest changes and how to deal with them

All of this needs to be considered in advance – if your workload has increased, how will you cope? Could your business afford to pay for temps to cover? It’s worth you setting out a simple clear sickness policy from day one, so both you and your employee know where you stand.

Pensions

Small employers are not currently obliged to set up a pension scheme, but will soon have. The automatic enrolment of staff in to a pension scheme started for large companies in April 2012 and is being introduced for all employers in stages.

The exact date from which your business must automatically enrol all staff in to a pension scheme – commonly known as your staging date – depends on your individual circumstances.

To find out the staging date for your business you will need to visit this page of the Pensions Regulator website and enter your Employer PAYE Reference. You should find this reference on your payroll documents such as P60s etc.

As well as the costs of managing the automatic enrolment pension scheme, as an employer you will need to contribute to each employees pension. The minimum employer contribution will be between 1% and 3% of the employee’s salary. For more help on dealing with Auto-Enrolment, read;

• A Guide to Auto Enrolment – 12 key facts small businesses need to know

Salary sacrifice schemes

You could also look at setting up a salary sacrifice scheme. This can save tax for your employee and also cut the amount of National Insurance you have to pay as an employer.

There are rules regarding what you can provide under salary sacrifice schemes, one of the most popular is providing childcare vouchers to contribute to your employee’s childcare costs.

For the full details of how the scheme works and how it can benefit both staff and business owners, read;

• How setting up a salary sacrifice scheme can reward staff and lower your tax bill

Employee benefits

As you take on more employees, you will need to start looking at other benefits, such as bonus schemes, company cars, and maybe even perks like private health insurance.

Your employees will be taxed on many of these benefits, so discuss them with your team first. These will all help to increase the loyalty of your employees to your business – but will also hit your cash flow. You can learn more about employee benefits in;

• Using staff benefits to motivate and retain employees

Premises

If you currently operate your business from home, you may need to take on new premises when you get an employee. Apart from the fact you might not want people working out of your spare bedroom, and it makes proper holidays difficult, you may struggle to get some necessary insurances on a domestic property.

To keep costs under control, consider renting a small office in a serviced building, where your bills will be predictable.

And finally, the biggest cost of employing someone is, your time

The biggest hidden cost in taking on an employee is how much of your time they will take up.

Apart from the initial training, paperwork and clarifying your business’s policies, they will need time each week keeping them on track and managing them effectively. If you skimp here, it will come back to bite you further down the line.

It’s worth thinking this through when planning how much extra work your business will be able to take on with an employee.

Also remember that no employee will be as dedicated or hard working as you – they don’t have as much to gain or lose from the business succeeding or failing. However, if you don’t hire any staff, you will never be able to grow your business!