The true cost of hiring an employee

If you’ve got to the point where you need an extra person to help out in your business, then that can only mean one thing – that you’re doing well! Whilst that’s fantastic, if you’re prudent, then you’re probably still weighing up whether it’s the right decision to make. Is there a need for long-term assistance or do you need temporary support to get you through a busy period? Whether you’re hiring for the first time or expanding your team, there’s always so much to consider when you’re making a significant investment in your business. To ensure you’ve got it covered we’ve put together a useful checklist of the 10 hidden costs associated with hiring an employee to help you budget for the true cost

But first, here are some red flag signs that you need more help in your business:

1. You’re struggling to meet deadlines. If you’ve taken on more than you can handle, you may find yourself working for far longer than intended just to meet them, trying to push them back wherever possible, or letting day-to-day essential tasks fall to the wayside just to keep up. Although it’s important to determine whether you were just overambitious or whether taking on as many jobs as you have is essential to your earnings, both reasons are strong indicators that you need help.
2. You have to turn down jobs. If you’ve been firm on maintaining your reputation and quality of work, it may mean that you’ve instead found yourself turning down work to ensure you consistently deliver the same high standards. No doubt this is disappointing, especially if you’ve noticed a growing interest in your business. If you’re keen to keep the momentum going, then getting extra help may be the smart move.
3. You’ve started to receive complaints when you didn’t before. Whilst this alone does not necessarily signal that you need an additional pair of hands to help as various other factors could be at play (not all which may be down to you!), it should still act a red flag to review the possibility. Despite best efforts of giving it your all, if you’re truly overworked then sacrifices in quality or mistakes are inevitable.
4. You’re looking to do more than you’re able to by yourself. It may be that you’d like to expand your business. For example, if you’re a graphic designer but also want to offer clients the option to help them build a website then you might want to consider hiring someone with these technical skills that you may not have time to learn yourself. It would therefore be reasonable to start thinking about hiring an employee.
5. Your health is suffering. Burning the candle at both ends really only leads to one thing, and that’s a decline in your health and wellbeing. From stress and burnout to injuries and accidents, it’s important not to let being overworked lead to long term health conditions or being abruptly prevented from working at all. Before letting things get too far, take a moment to consider whether extra help could be a real lifesaver.

Other options you can try first before hiring a full-time employee

We know that taking on an employee is a big decision and comes with a multitude of responsibilities you’ll need to manage; such as employment contracts, HR policies, onboarding, and training. This can be overwhelming, and if you’re not quite ready to get all that in order, then there are other options that will allow you to test the water out first before fully committing to hiring an employee. Here are some options that you can try out first:

1. Use a temp agency. Temporary workers can be a great option when you need extra help for a specific busy period or if an existing employee will be absent for a period of time such as for sickness leave, maternity leave, or a sabbatical. Temp agencies will have access to readily available candidates that can work at short notice, offer flexibility where you can easily extend or shorten the length of time you need a worker for, and cover many of the administrative responsibilities such as payroll and employment taxes. The downside to temp workers is that you have less control over who you work with as you’re not recruiting the worker yourself and it may not be an efficient solution if the job requires complex training.
2. Offer a work placement or work experience opportunity. Many students and young people will be looking for work experience to add to their CV. This can be an extremely affordable option as students often expect these opportunities to be unpaid or low-paid. However, be aware that students are not always available when you need them or for as long as you need them. You will find that younger school-aged children will only be available for a week or two at a time and will need to fit this in during school holidays, whereas university students may be available for a whole year but will need to return to their studies after.
3. Hire an apprentice. Apprenticeships are also an attractive option for many as they are highly affordable with government funding to support such schemes. Nevertheless, they are also a serious commitment with specific requirements that need to be fulfilled such as developing a formal training plan with regular assessments as well as time allowed for off-the-job training. They’re not suitable for all circumstances but, where you want to nurture and upskill an individual, it can be rewarding and mutually beneficial for both parties involved.
4. Use a freelancer. Working with a freelancer could be ideal where you want to access specialised skills without having to extensively train yourself. It’s another highly flexible option that allows you to choose to work with them on specific projects or jobs only without the need for a long-term commitment. The challenge, however, lies within finding the right freelancer that aligns with how you like to work. Finding someone who is reliable and can meet your standards and expectations will therefore take time.
5. Outsource jobs. Outsourcing can be a real lifeline as it allows you to rely on someone else’s expertise whilst you focus on your core responsibilities. There are a whole host of business functions that you can outsource such as your IT support, your marketing, your customer service support, and even your tax and accounting. You’ll find service providers that will work with all different sizes of businesses so there’ll be one to suit your budget but do be mindful that you’re still ultimately responsible for your business and so it may require a bit of management on your side.

10 hidden costs of hiring an employee

Now we get to the part that can help you budget for a new employee. Whilst not every point may be applicable to your own business, many of them nevertheless will be universal additional costs.

1. Recruitment fees. Finding the right person to be a part of your business is not always as simple as posting an advert and hoping the ideal person with the necessary skills and experience applies. You may want to think about turning to recruitment agents who have vast resources to scout for talent, as well as a comprehensive network of contacts, as this can be more efficient especially when you’re trying to fill a role quickly. Be prepared to face fees of anywhere from between 8% – 20% of the annual salary. Whilst this can be a substantial chunk of funds, know that you can deduct this either from your income tax if you’re a sole trader or corporation tax if you’re running a limited company.
2. National Insurance. National Insurance (NI) is a key additional cost when hiring employees. Not only does your employee pay it direct from their wages, but you as the employer are also responsible for paying Class 1A and Class 1B (where applicable on benefits-in-kind) towards your employee’s NI record. How much you need to pay is dependent upon your employee’s salary or value of benefits received, but it is charged at a rate of 15% as of April 2025, up from 13.8%. There is however the Employment Allowance which offers up to £10,500 tax relief against your employer’s NI liability from April 2025 onwards (increased from £5,000) which can help minimise this extra cost.
3. Employer’s pension contributions. It is a legal requirement for any employee over the age of 22 and under the state pension age that will be earning at least £10,000 a year to be automatically enrolled onto a workplace pension scheme. Whilst employees can choose to opt-out at any time, they must still be enrolled first, and this must start from their first day of employment. Employers are legally obliged to contribute a minimum of 3% of the employee’s salary, however you are free to contribute as much as you like so long as it does not exceed the annual allowance of £60,000 a year (including the employee’s own contributions). Unless the employee decides to opt-out of the workplace pension, this will be an ongoing cost for the duration of their employment, however you may want to consider using a salary sacrifice scheme to minimise this cost.
4. Employer’s Liability Insurance. Holding employer’s liability insurance is a legal obligation whenever you have at least one employee working for you in your business. The exception to this is where you operate as a sole trader and only have immediate family members that work for you, but this does not apply if you run your business as a limited company. However, sole traders can claim the cost of this as a business expenses against their profits and limited company directors can claim this cost to reduce their corporation tax.
5. Statutory pay. In the UK, employment legislation mandates that statutory pay must be paid by employers to all eligible employees under certain circumstances including statutory sick pay (SSP), statutory maternity/paternity pay, statutory adoption pay, and statutory redundancy pay. How much you need to pay and for how long is dependent on the situation. You may also be able to reclaim some types of statutory pay (between 92% to 108.5% for those that qualify for Small Employer’s Relief).
6. Holiday pay. Although holiday pay usually makes up part of the employee’s annual salary, and therefore is not seen as an “additional cost”, there are nevertheless some potential “hidden” costs that you will need to think about. For example, when they are away on holiday, who will be covering for them? This might not be such an issue for a day or two off, but if they request an extended period such as a week or more, then will you need temporary support to fill in? Alternatively, you could choose to close the business during a time where most of your employees would be likely to want time off such as over the Christmas and New Year period to mitigate the need to find cover, but this also prevents you from generating income whilst the entire business is closed.
7. Uniform. If your business requires your employees to wear a specific uniform that you supply, then this should be factored in as an additional cost. This can often be the case where you run a franchise business with strict uniform guidelines that may also include safety and hygiene equipment such as hairnets, gloves, or face masks. The cost of providing uniforms is however an allowable tax-deductible business expense.
8. Equipment. Similar to uniforms, don’t forget that you are likely to need extra equipment if you’re taking on a new member of staff. This can be tangible equipment such as an extra desk and chair, another PC, or even simply additional stationery. However, be mindful that it can also include non-tangible equipment such as software licenses and increasing your subscription or membership to platforms for a new user. A lot of equipment can be claimed as a business expense through the use of capital allowances, but be sure to check that the item qualifies and that you are also claiming in the correct manner.
9. Mileage. Will you expect your employee to travel for work aside from their regular commute to and from home to their usual place of employment? If so, you might need to consider making payments towards their fuel costs where they’re expected to travel for work in their own car. The most straightforward way to budget for this cost is to use the HMRC flat rate which allows for 0.45p per mile for the first 10,000 business miles travelled and then 0.25p per mile thereafter.  Even if you plan to offer a company car for the employee to use for business travel, there can potentially still be a further tax liability where they’re able to use the car for personal travel as well. 
10. Processing payroll. Finally, one of the most forgotten about hidden costs when hiring another employee is the cost of actually processing their payroll! Adding a new person onto your PAYE system usually involves administrative costs because there is extra work. If you’re outsourcing your payroll then it’s not uncommon for there to be a charge per person on your payroll, or if you’re managing your own payroll inhouse then you might find that there are subscription costs depending on the software you use.

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We hope this article was helpful, and if you enjoyed it, please be sure to subscribe to our monthly email newsletter or podcast series for more. If you find yourself unsure or overwhelmed with managing the payroll process for your business, then do get in touch to discuss our payroll service.