At HR by Tara, we frequently get asked how much it’s going to cost to employ someone. It’s not always an easy question to answer.
It’s always important to think through the cost of employment before you hire and some business owners are unfamiliar with what they have to pay. And then today, Autumn Budget 2024, the ground shifted for us small business owners, as new minimum rates of pay were confirmed and changes were made to what employer’s national insurance we’ll have to pay. So, let me try to help you out a little with the figures….
Employment costs
The things you need to take into account when calculating the cost of employment are:
Hourly rate of pay
Holiday pay
Employer pension contributions
Employer’s National Insurance (ERNI)
For employees aged under 21, you don’t have pension or ERNI costs.
Due to the fact pension contributions and ERNI are only applied to earnings above a certain threshold, you have to know how much someone is earning per month to work out the additional costs.
Imagine Sarah and Michael work irregular hours (so get holiday pay rather than paid time off as holiday) and average out at 40 hours per week each. Sarah is aged over 21 but Michael is under 21. They each get paid the minimum rate for their age group.
This is how the cost of employment would look:
Hourly rate | Cost of holiday pay (per hour) | Cost of ER pension contributions (per hour) | Cost of ERNI (per hour) | Total cost per hour | Additional cost as % of hourly rate | |
Sarah | £11.44 | £1.38 | £0.25 | £0.97 | £14.05 | 23% |
Michael | £8.60 | £1.04 | N/A | N/A | £9.64 | 12% |
However, there’s something called Employment Allowance that small employers can claim to reduce the cost of ERNI. Currently, you can reduce what you owe by up to £5,000. So, for many micro employers, this means they end up paying no ERNI at all.
If Sarah and Michael’s employer doesn’t have to pay any ERNI, then Sarah’s total cost per hour is actually only £13.07, only 14.2% extra on top of her hourly rate.
The budget announcements
With effect from April 2025:
National Minimum Wage (NMW) for under 21s is increasing
National Living Wage (NLW) for over 21s is increasing
The Rate of Employer’s National Insurance (ERNI) is increasing
You’ll pay ERNI on more of someone’s earnings, as the threshold will be lower
The Employment Allowance (to offset your ERNI bill) that you can claim as a small employer is increasing
How much impact all this has on the employment costs for your business will depend very much on your particular situation: what hourly rates you currently pay; how much each of your employees earn per month; and what your total pay bill is each month.
In the budget speech, it was stated that from April 2025 businesses will be able to have four full-time employees being paid NLW and not have to pay any ERNI. This does just about work out, but only if you consider full time to be 35 hours per week, anything higher means you’ll still pay some ERNI.
If you have 3 to 6 full time employees who are all already paid at £12.21ph (the new NLW) and you don’t give them a pay increase, then your total employment costs will actually go DOWN from April 2025 due to the increase in Employment Allowance. If you only have 2 employees then it will stay the same.
If you do give people a pay increase, then the increase in Employment Allowance will offset some of those additional costs.
If you have 3 to 6 full time employees and you’re moving everyone from the current NLW to the new NLW in April then your employment costs will probably increase by £120 to £165 per person per month. If you have 20 employees then the additional costs will probably be £215 per person per month.
What to do next
It's a good idea to start thinking now about what the impact of this will look like for your business. Your accountant should be able to help you run the numbers, but if you’d like any help from us then please just get in touch.
We have a document available with more details of the elements that make up the costs of employment and also some examples of how the costs work out in different scenarios. If you’d like a copy then just email support@hrbytara.com.
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