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Getting Started

Are you ready for the increase in employment costs?

Kington Smith considers the impending impact on employers

Are you ready for the increase in employment costs?

Benjamin Franklin once said, “By failing to prepare, you are preparing to fail”. This saying is very appropriate given the current employment climate and the changes that are on the horizon between now and 2020. It is never too early to prepare, so here are a few things you need to be aware of and start budgeting for, otherwise it could cost you dearly and eat into your profits over the next few years.


National Living Wage

For those currently paying £7.50 per hour to your employees over 25 years old, or perhaps all employees regardless of age, have you factored in the increase to £9 per hour by 2020? An employee’s salary working 40 hours a week on £7.50 is currently costing you £15,600 per annum – without your employers’ NI of 13.8%. By 2020, the same employee will be costing you £18,720, an increase of £3,120 for just one employee.


Pension auto-enrolment

If you already have a qualifying pension scheme and pay the minimum contribution levels as an employer, the employee in the above example will be costing £156 per annum. By 2020, not only will the national living wage have increased, you will also be expected to pay a 3% contribution as an employer, costing £561.50.


Cost of staff turnover1

The average UK staff turnover figure is currently around 15%, rising to more than 20% in sectors such as retail, catering, construction and media. The cost of recruiting and retaining staff also needs taking into account. Using the employee in the examples above, the cost of recruitment (agency fees and advertising) is around 20%, £3,120 + VAT; it can take an average of 28 weeks for an employee to become fully productive, so those 28 weeks cost £8,400.

While this totals £11,520 per employee who leaves and new employee who joins, you also have the unknown cost of the employee who leaves and takes all their knowledge, skills and training with them. This cost is low when compared to the average UK cost of replacing employees, which is currently at £30,614.


No more tribunal fees

Lastly, with the removal of the £1,200 cost for employees to lodge employment tribunal proceedings, we could see an increase in the number of claims submitted by employees against their employers. According to the British Chamber of Commerce (Dec 2011), the average cost of defending a claim is £8,500, plus the cost of paying out compensation if you lose and the disruption it has caused to the business.

So make sure you budget and prepare for the increase in costs of the national living wage and pension auto-enrolment. Think of ways to reduce your employee turnover, knowing that every person who leaves your business could cost you anything between £10,000-£30,000. Lastly, make sure you have comprehensive business insurance that covers you in the event of an employment tribunal claim.

The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management.

1 All figures in this section sourced from research carried out by Oxford Economics, March 2014.