If you are getting to the point where you are turning down work, or you have identified a new service or product idea, but don’t have the time to execute it yourself, it may be time to consider hiring employees, or one or more freelancers.
See our post about the importance of spending time on your business, not in your business.
Whether you need to consider hiring employees for full time or part time help, these are some of the key things to consider from a financial point of view for your business:
What are you looking for and how much ‘salary’ might you need to pay?
Take the time to consider tasks (aka ‘Job Specification’) you need them to do and how many hours you really need. Then have a browse around the internet job sites to see what the ‘going rate’ is in your location for this type of role. It will help you get a sense of how much it is likely to cost you as a salary.
Experience will often be one of the key points when hiring employees. This really needs to be considered up front, as it may be cheaper to pay an inexperienced person in the short term, but there is an internal ‘cost’ to your own time in training them. There is also the potential benefit to employing a person with a working background in your industry or specialism, who would bring additional experience to the role – is there a better way of doing what you are doing? This person may be the one to point that out.
If you decide to consider hiring employees that are inexperienced, consider apprenticeships as an option. Local colleges and various non-profit organisations exist to really help obtain and train good people. From a financial viewpoint this is a great low cost way to help build your employee level as your business grows (the starting minimum pay rate for apprentices is very low). The flip side is making the time investment to nurture and train the person in the role. As a side note, apprenticeships are often seen as just applying to younger employees, but this is not the case.
Here is a short(!) read from Gov.uk if you are interested in this area:
https://www.gov.uk/guidance/employing-an-apprentice-technical-guide-for-employers
Ok, so I know what I could pay my employee, what do I have to pay them?
You must pay them the National Minimum or Living Wage, the rate depends on age and whether they are an apprentice. You can see the current rates here:
https://www.gov.uk/national-minimum-wage-rates
You will also need to provide them 5.6 weeks (or pro rata if part time) paid holiday. As standard, Bank Holidays are not ‘on top’ of this, they are included as part of the 5.6 weeks you must give.
What about pensions?
You will need to consider this element whether your potential employee wants a workplace pension or not. This is probably a whole blog post on its own, but in brief the way it works is:
- If your prospective employee will earn over £10,000 a year (or pro rata in the pay period) they will HAVE to be enrolled on a pension scheme. This means you will need one set up. They can subsequently ‘opt out’ and leave the scheme, but initially they must be entered. That is why they call it AUTO enrolment!
- You have a legal responsibility to ‘asses’ your workforce’s pension status each time you pay and keep records of these assessment, along with some other administrative tasks.
- If they are auto enrolled you must contribute to the pension scheme also – more on this later.
- There are circumstances (based on age and earnings) where your employees may ask to be put into a pension scheme. In some cases you may not need to contribute anything, in others you still may have to.
A detailed guide on this is here for those who like a little ‘light; reading(!):
http://www.thepensionsregulator.gov.uk/docs/detailed-guidance-1.pdf
How will you pay them?
You will have to follow the rules for ‘Pay As You Earn (PAYE)’ and ‘Real Time Information (RTI)’ reporting for anyone employed by your business.
HMRC do produce a free tool for helping with this, but as with many things offered for free we wouldn’t recommend going it alone when your employee’s tax and money is at stake – the one area in life people get quite anxious about is their pay!
What you must do (generally) in brief is:
Calculate the amount of tax and National Insurance to deduct from your employee (if any)
Calculate the amount of pension you must deduct (if any)
Provide a payslip with all these details on, showing the ‘net’ wages (the amount they actually get paid)
Report to HMRC online with the amounts paid to employees, the amounts deducted in tax and national insurance – on or before the payday.
The other issue is whether to pay them weekly or monthly, or some other interval – it is your choice. If weekly, you will need to make sure your business’ cash flow supports this. You will also have the time cost, or actual cost if you have help with this, of ‘running the payroll’ every week rather than once a month.
Finally…. You must physically pay them!
Registering with HMRC as an employer
Before you can physical have a ‘payroll’ up and running, you need to register online as an employer with HM Revenue & Customs. This registration provides all the ‘account numbers’ you will need to submit data to HMRC. Again, we would normally suggest professional help with this, but it can be done via https://www.gov.uk/register-employer .
Employer’s Liability Insurance
This insurance is critical to project your business. When hiring employees you never know what you might encounter and as result, good liability insurance is key. Low cost and often bundled with any public liability insurance you may have. It would be our advice to dig out your current insurer and give them call.
As a side note, all of our clients gain access to completely free employment law advice, provided by our network of specialists, which means hopefully they will reduce their chances of ever needing to claim!
So…. What is the total cost of employing someone?
Its very easy to assume ‘gross’ salary (the amount you pay them before any tax is deducted) is the overall cost of employment, but there are some areas that often get overlooked. Here is a small list of costs to consider:
- Gross Salary (for example – £25,000 a year)
- Pension contribution as an employer (currently 3% at the date of writing)
- Employers National Insurance – you have to pay National Insurance as well on behalf of your employees when they earn over a certain amount (currently over £166 per week). This is 13.8% of their wages. Currently there is a great scheme by the government that writes off the first £3000 a year of this in most circumstances, so it is a great bonus for smaller employers.
These are the basic costs, some more specific and overlooked ones:
- 5.6 weeks holiday – not an actual cost (included in salary), there is a cost to the business of a drop in support during this period. Possible staff cover depending on the size of your team.
- Desks – will you need to kit your office out with another desk, seat and pens? If you have never looked at some of the prices of these you may be surprised!
- Software licences and IT – will you need to pay for another computer, and another set of software licences? Most software these days is a pay monthly, often per user affair.
- Canteen – if you provide free tea/coffee etc, it’s another seat at the table! You would be surprised how quickly this adds up. Even down to the amount of toilet roll……
- Human Resource Matters – Do you have employment contracts? If not, you will need them. You may also want employee handbooks etc – all a cost.
- Christmas party – again, another seat at the table if you pay for your team.
- Training – will you provide on going training? If so, there is a cost.
Using some example figures, your £25,000 a year hire could really cost you:
Salary £25,000
Pension £750
Employer NI £2,258
Desks etc £450
IT and software £630
Canteen £60
HR matters £125
Christmas party £120
Training £400
Total: £29,793 – the best part of another £5,000 on your initial figure!
If you took the ‘cost’ of the employee’s holiday into account, the total cost could look like nearly £33,000!
Summary
You may have just skipped to here. If so (we know, we know, you’ve got a million things on your to do list), the main takeaway from this post is that there are many tax and employment law issues surrounding hiring employees. There are also lots of other financial factors to consider than just salary, that make it important to get the right help, advice and planning to protect your business.
Building a team and a business is very rewarding, despite the potential pitfalls, so with the right support you will have peace of mind you are doing everything you ‘should’ be.
If you have any queries about any of the above, or are looking to make that first hire and would love some support, please contact our team who will be happy to cover in more detail.
Tel: 02392 240040
Email: info@heelanassociates.co.uk