Taking on your first employee can be an exciting step for a small business owner. Expanding your team could mean your business idea is working and that your company is growing. But, as much as new employees can help your business grow, they can also bring new challenges and financial pressure that your business hasn’t experienced before. 

When you’re employing new staff, you will need to keep in mind all sorts of costs. You will also need to consider how you run your business and build procedures when you’re taking new employees on board. This guide will help you track the main costs of hiring an employee and help you manage the impact on your business. In this article, we will cover the following:

  • Recruitment
  • Salary
  • Tax and insurance
  • Employer liability insurance
  • Employee benefits
  • Premises


Advertising for new staff can be costly. For example, local papers charge more for recruitment ads than any other ads. And a recruitment agency could ask for approximately 20% of your employee’s first-year salary to find the right candidate for the role. If you want to avoid these hefty costs, you could use social media sites, such as Linkedin, for advertising or contacting potential candidates. Job websites such as Indeed are also more cost-effective and tend to result in a high volume of candidates. 


When hiring a new employee, their salary is going to be the most costly expense. To minimise the financial impact, you could hire them part-time or employ them on a fixed-term contract. 

Something to consider when hiring someone full time is to set clear expectations at the beginning. Do you want to keep them for a few weeks or for the long term? Will you want them onboard full time in the future? 

Part-time employees might not be able to or want to work the extra hours, meaning you will have to find another employee to fill the space. That’s why it’s good to be clear about what you want to determine if they’ll be the right fit for you in the long run.

Additionally, hiring an employee means you need to pay them even if business is slow. You can’t reduce how much you pay them if they’ve done the work but it’s been a quiet month. Make sure you have enough in your budget to pay your employee even during times your business brings in less money.

Tax and insurance

Being an employer means that you are subject to many laws and regulations, ensuring that tax and National Insurance are paid for your new employee. Failure to pay these could result in penalties. 

Every month you will have to make sure that the correct PAYE income tax and deductions are made. You also need to pay the employer’s National Insurance for your employee. You could hire an accountant or bookkeeper service that offers payroll for you and ensures that you pay the right amount of tax and insurance—allowing you to focus on more essential parts of running your business. 

Employers’ liability insurance

When you take on any new staff, even if it’s just casual part-time employees, it’s compulsory to get employer’s liability insurance, which helps protect your team if they are injured or fall ill due to working for you. 

Your insurance must cover claims valued up to £5 million, and most insurers offer a basic £10 million cover. If you don’t have insurance, you could face massive fines – even as much as £2,500 a day. It’s also possible to get insurance to cover your company in the event of any legal claims by your employee, for example: if they are claiming false dismissal.  

When you’re researching employers’ liability insurance, it’s also worth ensuring your business is protected with public liability insurance and any other insurance related to what you do, such as professional indemnity insurance. A lot of insurance companies will offer a single package that includes all the cover you need.


Under the Pensions Act 2008, every employer in the UK must put specific staff into a workplace pension scheme and contribute towards their pension. This is called ‘automatic enrolment’. If you employ a minimum of one person, you’re an employer, and you have specific legal duties. 

What you need to do next will depend on whether you’re about to start your automatic enrolment duties or whether you came back for re-enrolment. 

Employee benefits

As you hire your first employee, you will need to start looking at employee benefits, such as bonus schemes, company cars, and other perks such as private health insurance. Of course, your employees will be taxed on many of these benefits, so discuss them with your employees. This will help increase your employees’ loyalty within your business – but it will also hit your bottom line. 


If you’re currently running your business from home, you may need to start renting new premises when you get an employee, unless you want to run a fully remote business. If you choose to rent an office, you can keep your costs low by renting a small office in a serviced building or a co-working space. 

Another option is something called ‘hot desking’ where you rent desks at an office for the day. For example, Clockwise offers hot desking and allows you to buy day passes to their fully serviced offices, co-working spaces, and meeting rooms. 

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