Calculating the Cost of your Employees Beyond their Wages

Last updated on February 28, 2023

Hiring staff is exciting. It means one thing - your business is growing. But, when hiring, it’s easy to fixate on the cost of the wage and the wage only

In reality, the true cost of a UK employee can involve a few different line items. There’s the cost of paying National Insurance and don’t forget the recruitment fees in the first place. All of this can shore up your cost per hire.

In this blog, we explore the true cost that comes with hiring and retaining employees. So when looking to expand your team, don’t forget to factor in all the below, so you’re crystal clear on how much it's going to cost.

Firstly, why do you need to understand employee costs?

The long and short of it is — you don't want to get into financial difficulties just because you failed to understand the true cost of hiring an employee. In the UK, the average cost per hire (based on a salary of £27,600) can run up to a whopping £62,890! Ad that’s just in the first year of employment. 

To accurately forecast business growth and map out a budget, you need to understand all things financial. The cost of employees plays a huge part in that.

Because hiring UK employees is about much more than just compensation, it can help to have reliable systems and processes in place to ensure you retain accurate financial data, i.e. any monetary benefits outside of salaries, health benefits, gym memberships, etc.

Then, when you understand how much you need to shell out for a new hire, you’re more informed, which means you can start looking for more cost-effective strategies when hiring. For example, not using a recruitment agency or improving your employee experience to retain staff.

What are the different costs involved in hiring an employee?

So what does the true cost of employing someone come down to? Here, we discuss the top six costs (and some bonus ones) you’ll want to consider when expanding your team. 

1. Recruitment costs

Sometimes, you’re best outsourcing to a recruitment agency to find the most suitable candidates. But accessing their sublime network of candidates isn’t cheap. The British Business Bank estimates that cost to fall somewhere between 20% and 30% of the employee’s salary. So, if you’re looking for a marketing manager who you’re willing to pay £45,000, that’s between £9,000-£13,500.

So if you’ve dabbled with the online job ad route — it might be time to cut your losses and save your sanity by outsourcing. But don’t forget to cost this up so you can afford it.

2. Pension contributions

All UK employers must offer a workplace pension scheme, which means you’ll have to consider these calculations when working out the total cost of an employee. As an employer, you must contribute at least 3% of your employee’s qualifying earnings.

But you can decide to contribute more than 3%, but this is entirely your call. Remember, as pension contributions are business expenses, you can get tax relief on them.

3. Employee benefits

Aside from the legal requirements (sick pay, maternity pay etc.), you can offer enhanced employee benefits to help attract (and retain) the best employees. By giving them access to better benefits, you’re showing them you value them. At the same time, this will boost the cost per hire.

Extra benefits could include contributing more to their pension pot, discounted gym memberships, and health and well-being subscriptions such as Medicash or other private healthcare. Some employers sign up for a subscription service like the ones offered by Perkbox. No matter what additional benefits you decide to provide, you’ll need to factor this into the true cost of an employee.

4. National Insurance Contributions 

Another legal obligation in the UK is National Insurance Contributions (NIC). What do you pay? At the moment, you must pay 14.53% (until April 2023) of your employee’s qualifying earnings for all of your full-time employees.

So, don’t forget to factor that into your employee costs because if you miscalculate NIC, you could face fines and penalties from HMRC

5. Sick leave

Sick leave is costly. And we’re not just talking about Statutory Sick Pay (SSP). Sick leave can disrupt your internal teams — they become overworked, or you have to hire outside help to fill staffing gaps.

When staff become overworked, they might take time off due to stress or anxiety, and you find yourself in a catch-22 situation. 

When it comes to SSP, as an employer, you must pay £99.35 per week for a total of 28 weeks. Of course, you can offer more than the minimum, but you must at least pay this.

Access to accurate payroll data means you can understand resource allocation and pinpoint teams with higher sick rates than others. This can prompt you to dig a little deeper and understand why that’s the case. Is the department overworked? Do they need better resources? You now have the answer to these questions with this data.

PayFit top tip:

Use payroll & HR software to get to the bottom of any team issues that threaten to destroy productivity and ruin team morale. 

6. Training and onboarding

Hiring new staff isn’t an instant process. When you send them your official job offer letter, the journey is only just beginning. You need to wait until they see out their notice period, join your organisation, onboard, get used to your processes, and start delivering work to the standard you expect.

All this takes time, which means it costs money. You might have to pay for training courses (direct costs) to get them up to speed, but you also have to let them settle in, which can hamper overall team productivity (indirect costs). 

Ace it with PayFit!

P.S. If you rely on manually collecting all the important information you need when an employee starts (P45, copy of passport etc.), then you can use PayFit to create automatic checklists, so no info is missed, and new starters get paid on time!

Other factors that can affect costs

Of course, other factors can affect the true cost of the employee you’re hiring, including location — London rent will be pricier, wages higher etc. Also, market conditions, if there’s a talent shortage in your line of work, expect to pay top dollar for talent. Your company size can also dictate costs — for example, when it comes to software, you might pay per employee — the more employees you have, the more costly the software becomes.

Tips to keep wasted hours down to a minimum

Productivity and wasted time are both costs that are hard to determine for employees. Instead, all you can do is combat them with smart solutions to make your processes more efficient to free up time elsewhere.


Automate simple finance tasks

 Basically, you can automate all the stuff that takes ages to make employees' lives (and the finance team’s) easier; tasks like generating and distributing payslips, working out tax calculations, and automating RTI and pension submissions.

No more second-guessing calculations and no more inaccurate or duplicate data — instead, everyone accesses the same data from a centralised location. This cuts any time wasted using manual calculations and data entry.

Avoid unnecessary meetings

According to research, 15% of the time at work is spent in meetings. Ok. But 71% of these meetings are actually unproductive. Meetings, particularly meetings without a clear objective, waste precious employee time. 

Educate staff members on tasks that require meeting input and those that require an email briefing instead. Consider keeping meetings interdepartmental to make them more focused and productive.

We all know time is money. So as part of the finance team, it’s your job to make sure costs are streamlined to help the business achieve its financial goals.

Consider a remote working policy 

Remote working ultimately saves everyone money. The organisation can cut electricity bills, and other office costs and employees save time, money, and energy when it comes to commuting. No more are hours wasted away sitting in traffic.

Remote working means remote meetings, where there’s less chit-chat and more purpose.

A remote working policy can also mean you tap into international talent. There are no borders to your recruitment because you’re no longer governed by your location.

If you’re looking for payroll software that can help you cut costs and save time, PayFit could be a pretty good choice.

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