Why SME bosses must calculate the cost of hiring

04 February 2015


For owners of young firms, taking on their first staffers is an exciting step. But it comes with a lot of financial baggage, warns a leading SME expert

John Allan

For any business owner, one of the most exciting milestones you can reach is hiring your first employee. It is a sign that your business is thriving, your ideas are working and you need more staff to deal with the extra work coming your way. It’s also vital for the health of the whole UK economy, which grows through the expansion of the SMEs who make up around 99% of UK businesses. However, there are all sorts of additional costs associated with hiring a new staff member.

According to recent research carried out by the Federation of Small Businesses – in partnership with the Centre for Economics and Business Research – small to medium-sized firms tend to pay more per new employee than larger businesses. Indeed, our findings showed that it costs more than £35,500 (on average) for a business to hire its first employee, as opposed to £25,100 for a company of 20 to 49 people. Those higher costs are generally non-wage costs, and usually it’s that first-time hire that costs the most. But where do these costs actually come from?


The answer lies in that old chestnut: the cost of doing business.

There has been a great deal of progress made in tackling these hidden impediments to growth in recent years. The introduction of the Employment Allowance in April 2014 removed the National Insurance burden from as many as 450,000 businesses, and benefited up to 1.25 million in total. Together with measures affecting other areas of industry – such as business rates relief and the reduction on fuel duty – a lot has been done to make it cheaper to do business.

The reason for this is that many of the costs are not as straightforward as a simple bill or tax, and additional factors such as pensions and man-hours also have to be taken into account.

Most obvious is the tax liability and National Insurance contributions that come with employing a new member of staff. Approximately a fifth of hiring costs are caused by this factor alone – without taking into account the new pension obligations resulting from auto-enrolment, which will begin to affect small businesses in greater numbers over the coming year.

There’s also the time cost to consider: in larger businesses, the labour associated with taking on new staff is shared between many employees. In a small business with fewer employees, a greater proportion of the available manpower is taken up by administration that could have been spent on generating income.

The growth of the small business sector remains the single biggest driver of the UK economy, and hiring extra staff to cope with demand is integral to that. Understanding the total cost of taking on staff, and where all of those costs go, will help small businesses make better decisions when they take that important next step.

John Allan is honorary national chairman of the Federation of Small Businesses.

For more thoughts on leadership in the SME arena, sign up to this forthcoming CMI seminar.

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