Salary and employee costs: How much does an employee actually cost?

What does an employee actually cost, and what expenses should you account for if you're looking to hire a new employee for your business? 

The term personnel costs cover all expenses associated with employing and retaining staff, beyond just their basic salary. Understanding and optimising these costs is crucial to maintaining the financial health of your business. 

In this article, you will learn more about the costs associated with an employee beyond their salary and whether additional expenses, such as social costs, should be included when calculating your annual expenditure. 

What does an employee cost? 

An employee’s cost is not limited to their salary. Various additional expenses are associated with employment, making it difficult to determine the actual total cost. 

What are personnel costs? 

Personnel costs refer to all expenses related to your employees and their employment. Many businesses only consider a few factors when calculating total personnel costs. However, these costs also include expenses such as recruitment, pensions, and sick leave. 

In short, personnel costs encompass all the expenditures your company incurs for an employee. 

What costs are involved beyond salary? 

A general rule of thumb is that personnel costs, beyond the employee’s salary, amount to 35-54% of the total expenditure and should be included in the overall personnel cost calculation. 

Here is an overview of some of the expenses you need to account for when hiring a new employee: 

• Salary 
• Labour market supplementary pension (ATP) 
• Pension contributions 
• Meals 
• Insurance 
• Travel expenses 
• Bonuses 
• Christmas party 
• Workwear 
• Company car 
• Company housing 
• Internet and telephone 
• Training and courses 
• Holiday allowance 
• Care days, additional holidays, and holiday-related loss of productivity 
• Payroll administration services 

Employee salary is a key personnel cost 

Salary is the most significant personnel cost—not just as a component of personnel expenses but often as the largest cost in a company’s overall budget. 

When hiring an employee, salary negotiations take place. However, the employee does not receive the full agreed salary, as certain personnel expenses, such as taxes and pensions, are deducted from the gross pay. These deductions are typically calculated when preparing payslips. 

As an employer, it is your responsibility to ensure the accurate calculation of employee wages, ensuring timely payment and the correct allocation of personnel-related costs. 

What does an employee cost per year? 

Estimating the exact personnel cost for an individual employee can be challenging. Costs vary depending on the industry and type of employment, as well as unforeseen expenses such as illness. 

Additionally, questions arise regarding which expenses should be counted as personnel costs. 

• Is recruitment a staff or an HR expense? 
• Should administrative costs, such as rent and utilities, be included? 
• Should you already consider potential redundancy or severance costs? 

Most personnel costs are fixed, but they may fluctuate depending on your business circumstances. Because of this, personnel expenses can make both small and large companies vulnerable. 

Thus, it is crucial to pay close attention when calculating your company's personnel costs. 

Can I reduce my personnel costs? 

According to HMRC, employers can deduct salary expenses and various employee-related benefits if they are directly linked to the operation of the business. These deductions may include salary expenses, business travel, and in some cases, healthcare schemes. Therefore, tax optimisation is essential to ensuring you receive full deductions for personnel-related expenses. 

Another way to reduce personnel costs is by outsourcing tasks that are not part of your company’s core business—such as cleaning, catering, payroll processing, accounting, and HR functions. 

Need help or advice? 

At Azets, we assist both small and large businesses with their financial management. 

If you need support with payroll administration, accounting, or advice on personnel costs, our consultants are here to help. 

Find out more about how we can assist with personnel costs