What is the True Cost of Hiring Someone in the UK?

For small business owners, the need to bring new talent on board inevitably arises. While salary budgeting is part of the equation, it's vital to account for the supplementary costs that come into play when growing your team.

This article delves deep into the breakdown of the costs related to employing personnel in the UK, offering a clear and practical guide aimed at hiring managers and Talent Acquisition (TA) leaders.

Considerations When Hiring in the UK

Before delving into the finer details, let us first gain a broader perspective of the requirements when employing someone in the UK. When determining the actual cost of hiring an employee, it is vital to account for several factors:

1. Pension: Contributions towards the employee's pension scheme.
2. National Insurance: Compulsory contributions to the National Insurance scheme.
3. Overhead Costs: Expenses associated with establishing the employee's workspace.
4. Recruitment Costs: The expenditures incurred during the hiring process.
5. Insurance: Employer's liability insurance and other forms of coverage.
6. Holiday and Sick Pay: Entitlements for leave and provisions for sick pay.
7. Maternity or Paternity Leave: Support for employees during family-related absences.
8. Performance Bonuses: Rewards for exceptional job performance.

In the following sections, we will break down each of these components in detail, providing insights into the costs involved.

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‍Pension Contributions

Employers must make contributions to the employee's Workplace Pension. This is a legal requirement, and all employees who join a company should be enrolled in the pension scheme within three months of recruitment. The minimum contribution to the pension fund is 8%, with employers responsible for at least 3%, and the remainder contributed by the employee.

Estimated cost: £828

National Insurance Contributions‍

 National Insurance contributions are mandatory for all employees. The rate varies based on an employee's age and earnings. For employees aged 21 or older earning more than £175 per week, employers are required to contribute 13.8% of their earnings to National Insurance. Distinct regulations apply when hiring apprentices under the age of 25, and supplementary contributions may be necessary for cash bonuses provided to employees.

Estimated cost: £4,037.

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‍Costs of Benefits

 Employers are responsible for providing workplace benefits to their employees. These benefits can vary from one workplace to another and should be included as part of the cost of hiring. Employee reward and recognition programmes, such as "Employee of the Month," office events, and transport subsidies (e.g., company cars, bikes, or scooters), also come with their own associated costs.

Estimated cost: £1,500.

‍Overhead Costs

To ensure a new employee can work effectively, overhead costs must be considered. These costs encompass essential equipment and the provision of a safe and comfortable workspace. This may include additional office space, increased utility bills, and other related expenses.

Estimated cost: £4,800.

Recruitment costs

Firstly, you need to find the right person. You have two options. You can use a recruitment agency, which can cost around 20-30% of the final salary, or you can choose to source yourself through various means link job boards, social media, your careers page. Depending on your strategy, this can cost around £300-£500 if you use for example LinkedIn and one job site per role you have listed. The costs add up when you add more boards and want to increase your exposure.

Estimated average cost: £3,000, based on 6 new hires.

Salary and Average Salaries in the UK

Understanding salary benchmarks is essential for budgeting and calculating the overall cost of employment. In the UK, a standard 35-hour work week, following a 9-5 schedule, is common. Here are the key salary considerations:

• National Living Wage (NLW): Employees aged 25 and above are entitled to a minimum hourly pay of £9.50, equating to an annual income of £17,290 or more.
• "Real" Living Wage: This standard suggests a minimum hourly rate of £9.90, or £11.05 in London, for individuals to cover their living expenses. According to this benchmark, employees should earn a minimum of £18,018 or £20,111 in London.

UK Government figures put the average salary at around £27,600.

Estimated average cost: £27,600

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Performance Bonuses

While not every company includes bonuses in their compensation packages, an increasing number are recognising their value in acknowledging outstanding performance and enhancing employee retention. On average, government data indicates that bonuses account for approximately 6% of the total pay.

Projected expenditure: £1,656.

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Additional Costs

The financial considerations extend beyond the basics. Various other expenses need to be factored in, including HR expenses related to new hires, costs associated with holiday and maternity leave coverage, sick leave provisions, company vehicles, software licenses, and more.

Projected outlay: £8,000.

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Yearly Cost of Employment: Calculation Example

To estimate the comprehensive cost of employing someone in the UK, a general guideline is to add approximately 75-100% to their salary. However, this is an estimate, and actual costs can vary. Here's an illustrative example:

• Salary: £20,000
• Office rent per desk: £10,000
• Recruitment costs: £3,000
• National Insurance: £3,000
• Business energy bill (for a five-person office): £3,000
• Training: £2,500
• Pension contributions: £800
• Employers' liability insurance (lowest estimate): £80
• Total: £40,380

In summary, it is advisable to comprehend and budget for all these costs in advance to prevent unexpected financial surprises.

Additional Employee Entitlements

Aside from the previously mentioned costs, employees in the UK are entitled to additional benefits and provisions, which employers are responsible for. These entitlements include:

• Holiday Pay
• Statutory Sick Pay (SSP)
• Maternity or Parental Leave
• Performance Bonuses

These entitlements, among others, must be factored into the overall cost of employing someone in the UK.

Make Recruitment Smarter with Occupop

Efficiently managing all these recruitment expenses is vital for businesses, especially in the SMB space. If you are seeking a more intelligent, cost-effective, and long-term recruitment solution, consider utilising an Applicant Tracking System (ATS) like Occupop. An ATS can help streamline your recruitment processes, reduce costs, and enhance your hiring efficiency. Discover how Occupop can be your strategic partner in achieving a more cost-effective and streamlined recruitment process.

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Frequently Asked Questions About the Costs of Employing Someone

Here are some common questions that employers often have when considering the costs of employing someone in the UK:

Q: What are the costs of employing someone?

‍A: As a rule of thumb, they typically amount to an additional 75-100% of the employee's total salary.

Q: How much do pension contributions cost?

‍A: Pension contributions should be a minimum of 8% of yearly income, with employers contributing at least 3%.

In conclusion, understanding the full scope of costs associated with employing someone in the UK is essential for effective financial planning and management. Hiring a new employee can cost more than you might think. Small businesses, in particular, must be careful with their budgets when bringing in new team members to avoid straining their finances. However, employees are the backbone of a company's growth, making it essential to hire new people. The key is to be aware of the actual costs involved.

I know this has been a long article and there’s a lot to take in here. If you’ve got any questions, feel free to reach out and I will help where I can. I’d also recommend checking out these resources too:

• Driving Efficiency: How to Reduce Your Company’s Average Cost Per Hire a in-depth look into the strategies and tactics that can assist you in reducing your company's CPH.
• Top 10 Ways To Reduce Recruitment Costs In 2024 designed to help you implement the most critical measures to increasing your hiring efficiency and controlling your costs.

Every day, the Occupop team works with hundreds of small to mid sized businesses to optimise their sourcing strategies, help them manage their candidates, build strong talent pools, all while helping them take control of their recruitment costs.

Get in touch today to see how we can help you reduce your recruitment spend and increase your quality hires.