How to calculate the cost of an employee 

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Making the shift from business owner to employer isn’t easy. You have regular wages to pay and, your employee is relying on you to keep this up.  

When you are planning on recruiting, don’t make the mistake of thinking that your only expense will be your employee’s salary. There are other costs of employment you need to consider. 

How much to pay an employee? 

If you decide you want to employ someone for your business and you also choose to pay them the National Minimum Wage. For those 23 years and over, the current rate is £10.42 per hour.  Assuming a 35-hour week, 9 to 5 working week that’s a salary of £18,964 per annum. 


National Minimum Wage 



21-22 year old 


18-20 year old 


16-17 year old 





How much Income Tax is deductible? 

The current Personal Allowance (how much an employee can earn before they are taxed) is up to £12,570. 

The Personal Allowance will be slightly higher if your employee is claiming Marriage Allowance or Blind Person’s Allowance. It is lower if an employee earns more than £100,000 a year. 

For the current 2023/24 year: 


Taxable income 

Tax rate 

Personal Allowance 

Up to £12,570 


Basic rate 

£12,571 to £50,270 


Higher rate 

£50,271 to £125,140 


Additional rate 

Over £125,140 



What are National Insurance contributions? 

Employees earning more than £183 a week pay National Insurance Contributions, which entitles them to certain benefits and the State Pension.  

There are different classes of National Insurance. Employees who are under State Pension age pay Class 1 NICs. You (the employer or your service provider) deduct these when doing your payroll. 

For the 2023/2024 tax year: 

Less than £242 per week 


£242 to £967 per week (£1,048 to £4,189 per month) 


Over £967 per week (£4,189 per month) 



Class 1 contributions are also deducted from: 

  • commission or bonuses  
  • Overtime 
  • Sick pay 
  • Maternity, paternity and adoption pay

Auto-enrolled pensions 

As explained on The Pensions Regulator website: Under the Pensions Act 2008, every employer in the UK must put certain staff into a workplace pension scheme and contribute towards it. Failure to comply with these legal duties can lead to fines. 

Essentially, a percentage of an employee’s pay is put into a chosen pension scheme automatically each payday, with employers also having to contribute. The rates are reviewed by the Government annually. 

For the 2023/2024 tax year: 

Employee minimum contribution 

Employer minimum contribution 



Earnings for pension payments also come from: 

  • commission 
  • bonuses 
  • overtime 
  •  sick pay 
  • Maternity, paternity and adoption pay 

What other costs are there? 

There are a variety of other costs to consider when hiring staff for your business.  

  • Recruitment costs: The cost of the recruitment process can be expensive when factoring in the tasks required. Those tasks include creating the job advert, advertising the role, interviewing the candidate and onboarding the new employee. If you use a recruitment agency, they will take a fee (usually between 15% and 20% of the annual salary) 
  • Employer’s liability insurance: It’s a legal necessity to have this insurance if you employ staff. According to GOV.UK: EL insurance will help you pay compensation if an employee is injured or becomes ill because of the work they do for you. How much your policy costs will depend on the number of employees you have and the nature of your business.
  • Criminal record (DBS) checks: Some businesses may need to carry out a criminal record check on the employee. The total cost of doing a basic check including VAT is £37. 
  • Membership fees: If the new staff member is part of a membership body, it is sometimes expected that the employer covers this cost if it is relevant to their role. These costs will range from £100 a year to £500 depending on the body.    
  • Equipment: Depending on the job, equipment for the employee will probably need to be supplied. This could be such things as a computer, office furniture, other IT packages or uniform. 
  • Training: Again, whatever the job, further training will inevitably need providing. The costs for this depend on the type and level of the training. 

Other employee entitlements 

Although you’ll be paying your employees every month, they won’t be working every day as they are entitled to: 

  • Holiday pay (including bank holidays) 
  • Sick pay 
  • Maternity/Paternity pay 

You’ll also have to ensure that you’ve got all the correct employment contracts, documents and HR policies and procedures in place. 

To conclude 

As a rule of thumb, an employee’s cost is likely to be at least 1.5 times their gross salary. 

If you get someone else to take care of your payroll, whether a bookkeeper, accountant or another service provider, obviously you’ll have to pay them a monthly fee, but it could save you much time and effort.  

If you decide you would like to hand over the job, our team will be very happy to discuss it with you. 

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Disclaimer: Information provided by Kidwells Accountancy on our website is for informational purposes only. It is provided in good faith but we make no guarantee of any kind regarding the accuracy, reliability, or completeness of any information on our site. We always recommend businesses seek independent legal and financial advice before working with us or acting on any information on our website.

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