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30 October 2014

Groundbreaking analysis sheds light on the cost of taking on your first employee

Reference number: PR 2014 34

FSB News Release 
PR 34 2014

Issue date: Thursday 30 October 2014

Groundbreaking analysis sheds light on the cost of taking on your first employee

The FSB (Federation of Small Businesses) and the Centre for Economics and Business Research (CEBR) launch groundbreaking analysis today (Thursday 30 October), which estimates the employment costs facing the typical small business. 

The UK labour market has made a lot of progress over the past year and FSB research found that a net balance of seven per cent of small businesses want to hire more staff this quarter. To continue this positive trend, the FSB is calling on Government to lower the costs of doing business to encourage more firms to take on staff - including those that currently don''t have any employees.

The research estimates that a typical small business pays out on average £189,600 towards staff costs, of which 15.1 per cent are non-wage costs. These include employer''s national insurance contributions, payroll processing and hiring a replacement staff member in the event of a worker being off sick. Total employment costs are estimated to be highest in the health and education services sector (£280,900) and lowest in the accommodation and food services sector (£117,400).

Businesses taking on their first employee face higher non wage costs relative to salaries compared with larger firms. On average, a business with one employee and one owner faces an average employment cost of £35,500 per worker. Approximately 20 per cent of total employment costs come from national insurance contributions, as well as income tax on the owner''s salary. In addition, the cost of the business owner''s time in carrying out regular administrative tasks is estimated to be equivalent to 2.3 per cent of total costs, paid f out of the owner''s salary. 

In contrast, a typical business in the 20-49 employee category faces an average cost of £25,100 per worker. As a business increases its headcount, a greater proportion of total employment costs are devoted towards the wages of employees, instead of overheads, meaning that firms may become more efficient with size. 

John Allan, National Chairman, Federation of Small Businesses, said: 
"Small businesses have been responsible for many of the jobs created in recent months and this must continue. What this new index shows, is the cost of taking on your first member of staff can be considerably higher than taking on your twentieth. 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."

Charles Davis, Director, CEBR said:
"This research follows a significant rise of self-employment in an increasingly entrepreneurial Britain. But one of the key findings here is that hiring one''s first employee costs a lot more than just paying their wages. This raises the question: could the Government do more to make it easier for the plethora of one-man bands and micro businesses to take on more employees?"


Notes to editors

1. The FSB is the UK''s leading business organisation with around 200,000 members. It exists to protect and promote the interests of the UK''s Real-Life Entrepreneurs who run their own business. More information is available at 

2. Centre for Economics and Business Research Ltd (Cebr) is an independent consultancy with a reputation for sound business advice based on thorough and insightful research. For more information please visit: 

3. The Employment Costs Index is available to view on request by contacting:  

4. A technical paper is available on the CEBR website at: 

5. The index is built using provisional wage data from ASHE for 2013 (the latest available). In line with official statistics, a typical small business is assumed to have 7 workers, including the owner manager.

6. The index includes a range of employment costs including wage costs, the highest contributor to employment costs, and non-wage costs, which come in two forms: regular and occasional non-wage costs. Regular non-wage costs include Employer''s National insurance contributions, payroll processing and employer pension contributions; while occasional costs include having a staff member absent due to maternity or sickness absence, redundancy costs and legal fees associated with Employment Tribunals.

7. The index''s assumptions are based on 20+ variables; for example, the likelihood of maternity leave occurring, NIC rates and time spent complying with new regulations. These variables can be adjusted, to model the impact of different scenarios on the employment costs of small businesses.

8. CEBR and FSB will update the index annually to factor in changes to ASHE wage data and government policies. Ad-hoc requests, for instance modelling the impact of a change in NICs policy, can be arranged on request by contacting: 

FSB media contacts

Liesl Smith: 020 7592 8128/07917 628926 
James Gribben: 020 7592 81286 / 07854 897974