The Cost of Employing Staff

Employing staff is often a crucial aspect of running a business. Therefore, it is essential to understand the financial responsibilities that come with it, for both the employer and the employee.

Some of the key considerations are detailed below:

Pay As You Earn (PAYE)

Before hiring staff, employers must register for a PAYE scheme with HMRC. This system requires employers to deduct Income Tax and National Insurance from employee wages and pay them directly to HMRC on the employee’s behalf. The PAYE cost for each employee will be calculated using their individual tax code issued by HMRC. PAYE deductions do not represent an additional cost to the employer as they are deducted from an employee’s gross wages, reducing the amount they actually receive, known as their net wages.

National Insurance Contributions (NIC’s)

There are two main types of NICs associated with employment:

-          Class 1 Primary - paid by employee’s and deducted from their gross wages

-          Class 1 Secondary - paid by employers and is an additional cost of employment

Both Class 1 Primary and Class 1 Secondary NIC’s are submitted to HMRC through the PAYE scheme.

Class	Paid by	2025/26 Thresholds	2025/26 Rates
Class 1 Primary	Employee	£0 - £12,570 £12,570 - £50,270 > £50,270	0% 8% 2%
Class 1 Secondary	Employer	£0 - £9,100 > £50,270	0% 13.8%

Employment Allowance: Eligible employers can claim up to £10,500 (2025/26) annually to offset their Class 1 Secondary NIC liability. Therefore, if the total NIC due is below this threshold, the employer pays nothing in Class 1 Secondary NICs.

National Minimum Wage

As an employer, you are required by law to pay at least the national minimum wage based on an employee’s age and whether they’re an apprentice.

Category	2025/26 Hourly Rate
Apprentice	£7.55
Under 18	£7.55
18 to 20	£10.00
21 and over	£12.21

Workplace Pensions

By law, all employers must offer a workplace pension scheme to their employee’s. Automatic enrolment will apply to employee’s who are aged between 22 and State Pension age and earn over £10,000 per year. However, eligible employees can opt-out of a workplace pension scheme where they meet the automatic enrolment criteria but do not wish to enrol. Likewise, those who do not meet the criteria can request to opt-in and an employer cannot refuse.

For the 2025/26 tax year, minimum workplace pension contributions are as follows:

Employee Contribution - 3% of qualifying earnings (deducted from gross pay)

Employer Contribution - 5% of qualifying earnings (an additional cost in excess of gross pay)

Statutory Sick Pay (SSP)

Under current employment law, employers must pay SSP to employees who meet the following criteria:

-          Have been sick for at least 4 consecutive days (including non-working days)

-          Earn an average of at least £125 per week (before tax)

-          Report their sickness within 7 days or within the employer’s set deadline

If all of the above criteria have been met, an employee is entitled to receive SSP for the qualifying days they would have worked, with the exception of the first 3 sick days, known as ‘waiting days’.

SSP is currently paid at £118.75 per week, for a maximum of 28 weeks. This is processed in the same way as normal wages through the PAYE scheme and is funded by the employer.

Conclusion

Whilst there can be many other financial implications of employment not outlined above, by understanding some of the key considerations, employers can make informed hiring decisions. Careful budgeting, regular updates on legislation, and seeking professional advice when needed can also help to avoid unexpected costs and stay compliant with UK regulations.