5 financial implications of hiring additional staff

As the UK begins the slow process of recovery, many firms are beginning to consider expanding their workforce again. Josh Hall discusses the financial implications of hiring more staff.

Many savvy business owners will right now be considering how they can make the most of the new opportunities that will be presented by a strengthening economy. But success is contingent upon, amongst other things, having a staffing resource that meets the workload involved and this can be costly.

In many ways, now seems like a particularly good time to be hiring. The job market is still relatively stagnant, and well qualified workers are willing to take on jobs for a significantly lower headline figure than would have been expected 18 months ago.

At the same time, job satisfaction amongst those in work is plummeting – but many of those who are fed up with their current jobs are prevented from leaving by a fear that they will not be able to secure another one. Firms offering new and exciting positions are therefore in a unique position to attract talent at comparatively low cost.

But the headline salary is, in many ways, the least of your financial worries. There are significant costs associated with taking on new employees, above and beyond the wage that you pay them. It is important that you understand these costs before you start recruiting.

The price of recruitment

The costs begin before you even take on a new employee. According to the most recent studies, firms spend £5,000 recruiting the average employee. This cost increases with the seniority of the position; it is not uncommon for companies to spend £50,000 recruiting for management roles.

The bulk of these figures are made up of agency fees and advertising costs. While firms have to work less hard to secure employees in the current climate, it will still be necessary to do some sort of advertising – and this comes at a price.

As well as this, though, it is also important to factor in miscellaneous costs like time taken out of your day to sort through CVs and interview candidates. The recruitment process can be time-intensive, and may well have a detrimental effect on your productivity.

Beyond the headline salary

Potential employees will naturally be concerned with the wage you will be paying them. But they will also want to know what additional benefits, if any, they will be entitled to.

Employee benefits can be an expensive proposition – particularly today, when they are an increasingly important tool for attracting top quality candidates. According to recent information the most popular benefits include a final salary pension, extra holiday entitlement and a company car scheme. All of these come at significant cost.

While it is true that firms enjoy tax relief on many employee benefits, this is unlikely to offset the entire cost to your business. Of course there are other advantages to offering employee benefits; survey after survey has shown that a good benefits scheme will increase productivity and morale among staff. Regardless, you must factor in this cost before taking on new employees.

Your tax bill

Taking on a new employee is also likely to increase your tax bill. You must pay Employer’s Class 1 National Insurance Contributions on payments made to employees over the Lower Earnings Limit. This is set at £95 per week, £412 per month or £4,940 per year for the 2009-10 tax year.

If you are considering taking on your first employees, you should also remember that you are obliged to operate a PAYE scheme. This can be an expensive proposition; you may need to purchase new software, and you will certainly need to factor in the time it will take you to learn and operate it. You will also be required to complete an Employer Annual Return at the end of each tax year.

Read more about employee tax and PAYE

Training

Your new employee will almost certainly require some training. The cost of this process will, to a great extent, depend on the nature of the job; you may, for example, need to provide them with specialist instruction, particularly if your business operates in a high-risk industry like construction.

Again, some training costs are tax deductible. But at the very least you should recognise that you, or another member of your staff, will be taken away from your normal work for a period of time in order to bring the new employee up to speed. This comes at a price – and there are no tax breaks available.

Business insurance

If you take on staff for the first time, you’ll need to change your current business insurance policy and add Employers’ liability insurance cover. This is a legal requirement for any incorporated business which has one or more employees.

You can buy it as part of a single business policy along with your public liability and any additional covers, which can reduce the overall cost and make your business insurance easier to manage.

And so recruitment comes with significant costs beyond the headline salary. Benefits, training and tax will all have to be covered once a new employee is found – but the costs of recruitment begin much earlier. When considering taking on a new employee it is therefore vital that you consider these inevitable outgoings.