New analysis of the cost of taking on your first employee

03 November 2014

The FSB (Federation of Small Businesses) and the Centre for Economics and Business Research (CEBR) have launched new analysis estimating the employment costs facing the typical small business.

The report says that:

The UK labour market has made a lot of progress over the past year and FSB research found that a net balance of seven per cent of small businesses want to hire more staff this quarter. To continue this positive trend, the FSB is calling on Government to lower the costs of doing business to encourage more firms to take on staff - including those that currently don't have any employees.

The research estimates that a typical small business pays out on average £189,600 towards staff costs, of which 15.1 per cent are non-wage costs. These include the employer's national insurance contributions, payroll processing and hiring a replacement staff member in the event of a worker being off sick. Total employment costs are estimated to be highest in the health and education services sector (£280,900) and lowest in the accommodation and food services sector (£117,400).

Businesses taking on their first employee face higher non wage costs relative to salaries compared with larger firms. On average, a business with one employee and one owner faces an average employment cost of £35,500 per worker. Approximately 20 per cent of total employment costs come from national insurance contributions, as well as income tax on the owner's salary. In addition, the cost of the business owner's time in carrying out regular administrative tasks is estimated to be equivalent to 2.3 per cent of total costs, paid f out of the owner's salary.

In contrast, a typical business in the 20-49 employee category faces an average cost of £25,100 per worker. As a business increases its headcount, a greater proportion of total employment costs are devoted towards the wages of employees, instead of overheads, meaning that firms may become more efficient with size.

John Allan, National Chairman, Federation of Small Businesses, said:

"Small businesses have been responsible for many of the jobs created in recent months and this must continue. What this new index shows, is the cost of taking on your first member of staff can be considerably higher than taking on your twentieth. The future growth of the UK economy depends on more entrepreneurs taking the leap to becoming employers. This means Government has to redouble its efforts to make it cheaper to hire staff."

Charles Davis, Director, CEBR said:

"This research follows a significant rise of self-employment in an increasingly entrepreneurial Britain. But one of the key findings here is that hiring one's first employee costs a lot more than just paying their wages. This raises the question: could the Government do more to make it easier for the plethora of one-man bands and micro businesses to take on more employees?"