Hiring first employee is the most expensive for SMEs, says report

A new report has shown small and medium-sized enterprises (SMEs) should receive more support from the government to hire staff as taking on their first employee is often the most expensive hire they make.

Getting a new business off the ground can be a difficult process, one that requires a huge amount of willpower as well as investment. For many of those firms, the next big step in their lifecycle is taking on their first employee. But as new research shows, that can also mean a significant investment.

Analysis from the Federation of Small Businesses (FSB) and the Centre for Economics and Business Research (CEBR) shows that firms consisting of one owner and one employee are likely to face average employment costs of £35,500 per worker.

That includes employer National Insurance contributions and the income tax payable on the owner’s own salary.

Collectively, these two expenses alone make up a fifth of the total cost. But when an entrepreneur becomes an employer it also comes with additional administration duties. Some 2.3 per cent of the cost is simply the price of the owner’s time spent meeting these obligations, paid out of the owner’s salary.

Interestingly, it does seem that these first hiring decisions lay the foundations for cheaper recruitment in the future. For example, the average business in with 20-49 employees faces costs of around £25,100 per employee – but a greater proportion goes on actual salaries, while overheads actually decline.

Payroll processing, National Insurance and the actual recruitment process can add up, and small firms are arguably in the worst position to pay, since they have fewer resources than their larger peers. However, given the growth rates of small businesses in the UK, it’s clearly not putting them off.

“Small businesses have been responsible for many of the jobs created in recent months and this must continue,” said John Allan, national chairman of FSB.

“What this new index shows, is the cost of taking on your first member of staff can be considerably higher than taking on your 20th.

“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.”