If you find yourself in the situation of needing additional labour or increasing business growth you have the options of employing someone through PAYE or using the services of a Freelancer or Professional contractor.
It is fair to say that a freelancer or professional contractor will command a higher hourly or daily rate but it is worth calculating the costs properly for both options.
Contracted in Staff
You have a contract between your Limited Company and the Contractor's Limited Company.
You have the option of renewing or releasing the nominee in the contract according to the terms and conditions set out in that contract.
The Contractor is responsible for applying PAYE to their earnings and IR35 status.
You do not have to pay holiday pay, sickness or absence and have no employee/employer status with the relationship.
Employed Staff
You can usually expect the cost of employing a member of staff 21% greater than the salary that you will pay them.
After 12 weeks continual employment they have employee rights and have an entitlement to:
- Holiday pay minimum 5.6 weeks (28 days when working 5 days a week) per annum
- Sickness pay under SSP rules
- Statutory maternity SMP / paternity SPP /adoption leave SAP
- Notice period as set out in the contract of employment
- Redundancy payments over 2 years continual employment
Example of Costing
An employee who earns a basic salary of £20,000 per annum:
£20,000 less £5,715 allowance = £14,285 x 12.8% Employer NICS = £1,828 = Total cost of £21,828
True cost for working days available after holiday:
£21,828 / 232 days = £94 true daily cost.
This is your breakeven cost.
£21,828 / 260 days = £83 x 28 days = £2,324 you pay them whilst on holiday and you are not earning fees during this time.
For small companies whose National Insurance liability is below £45,000 per annum, 100 % of SMP, SPP and SAP can be recovered.
However, SSP can only be recovered using the 'Percentage Threshold Scheme' (PTS) where the amount of SSP in the month is greater than 13% of the total Class 1a NICS employees and employers due in that month.
Employees are entitled to redundancy payments in most cases if they have been employed for a continuous two year period.
The amount due is based on age and length of service.
Consideration needs to be given to your profit margin.
Are the fees from the end client sufficient enough to cover the financial and other risk factors involved in taking on an employee?