Before recruiting a new staff member, it is essential to understand how much an additional staff member will cost and add to the total business overheads. Preparing an employee cost calculation allows the business to check it has the financial resources to cover the extra costs. The three main costs to include in the calculation, are the annual salary, workplace pension, and the employer national insurance contributions.
As an example, assume you recruit a new employee on an annual salary of £25,000, the total cost of employment to the business will be £27,945, consisting of:
| Salary | £25,000 |
| Employer’s national insurance | £2,195 |
| Workplace pension | £563 |
| TOTAL | £27,758 |
Calculations
It is helpful to understand the calculations behind these figures. Employer’s national insurance is paid at 13.8% on monthly earnings over £758. In the illustration, dividing the annual salary by 12 gives the monthly salary of £2,083. From this amount deduct £758, leaving £1,325, which is multiplied by 13.8% to get the employer’s monthly national insurance contribution. This is £182.85 per month or £2,195 per year.
The calculation for the workplace pension contribution is 3% on eligible earnings. The current thresholds for workplace pensions are £6,240 and £50,270. Pension contributions are paid on earnings falling between the thresholds. In the above example 3% is paid on £18,760 (£25,000 less £6,240). On salaries above the upper threshold of £50,270, the contribution is 3% of £44,030 (£50,270 less £6,240). No contribution is due on earnings above the upper threshold.
The pensions regulator has a useful calculator to work out employer workplace pension contributions:
Employer Contributions | The Pensions Regulator
Employer’s national insurance allowance
Some employers are eligible for the annual employer’s national insurance allowance of £5,000. The national insurance allowance is beneficial to small employers with just a few employees, as it significantly reduces the cost of national insurance to the business.
HMRC calculators
HMRC has a useful calculator to work out both employee and employer national insurance contributions:
HM Revenue & Customs: Class1NICs-1 (hmrc.gov.uk)
Employee and employer NI contributions for company directors are paid at a slightly different rate to employees. The link below will take you to the HMRC calculator for the director’s NI:
HM Revenue & Customs: DirectorsClass1NICs1 (hmrc.gov.uk)
Workplace pension
Employers are legally required to contribute a minimum of 3% to the workplace pensions of eligible staff members. Eligible employees are employees aged 22 years and over earning £10,000 and above in a job. Some employers may choose to contribute a higher percentage to the pension as a staff benefit or perk.
New employers | The Pensions Regulator
Other earnings
Any other earnings that employees receive such as commission must be added to their base salary in the calculations, as commission and bonuses are subject to employer national insurance and pension contributions.