What does it actually cost to employ someone?

England and Wales: This page sets out the position in full. Scotland: the same position, with no difference in principle — the minimum wage, employer National Insurance and the pension minimums are UK-wide. Northern Ireland: the same position on pay, National Insurance and pensions; the one difference is that compulsory Employers’ Liability insurance comes from Northern Ireland’s own separate instrument, covered below.

The cost of employing someone, line by line

This step is for the treasurer, manager or trustees working out the cost of employing someone before a grant bid.

It opens the paid-staff part of this hub; if the role might be a volunteer role instead, decide that first. These payroll figures apply in England and Wales, Scotland and Northern Ireland alike. HMRC collects employer National Insurance through payroll. Employers’ liability insurance is the exception. The section on the mandatory cost outside the total covers it.

Here is what one post costs on the worked figures this guide uses. The salary is an example, not a recommendation. Every figure moves each April, so rework it from the current rates when you budget.

So the salary is not the cost. The two lines on top of it are set by law. A charity that budgets the salary alone has under-budgeted before it has bought a laptop.

Two things are left out of that total on purpose. Statutory Sick Pay depends on whether anyone is ill, so it cannot be budgeted as a fixed line; allow for it in the cashflow forecast instead, as handle sickness absence explains. The employee’s own pension contribution comes out of their pay, so it is not your cost at all.

The pension line is where the sums go wrong

The employer pension minimum does not apply to the whole salary. It applies to qualifying earnings: the slice of pay between £6,240 and £50,270 a year.

That is the calculation charities get wrong most often. The percentage — 3% from the employer, 8% in total — gets quoted without the band it applies to. Someone multiplies it by the full salary, and the budget overstates the pension cost by a real margin. On a small grant, that margin can be the difference between a bid that looks affordable and one that does not.

Work it out in two steps. First take the salary, capped at the top of the band. Then take off the bottom of the band. The employer minimum applies to what is left.

Your charity can pay more than the minimum. But the minimum is the statutory figure, and it is the one the table uses.

Who has to be enrolled at all, and how to set the scheme up, is the subject of set up the workplace pension. Auto-enrolment starts once a worker earns more than £10,000 a year.

Employment Allowance: charities qualify by their own route

Employment Allowance is an HMRC relief that lets an employer reduce its employer National Insurance bill by up to £10,500 a year. Two points about it matter to a charity, and both are commonly missed.

Charities have a separate way in. Many businesses are shut out if more than half their work is in the public sector. That test catches commercial contractors. Charities do not go through it. They qualify through a gateway of their own on HMRC’s eligibility page.

So a charity that carries out NHS or council contracts is not excluded because of who pays for the work. One limit does apply: where two or more charities are connected, only one of them may claim.

It is a relief, not a reduction. The allowance cuts the cash you pay HMRC. It does not change what the post costs. Budget the full statutory total from the line-by-line cost table, and treat the allowance as a cash-flow benefit.

That is what full cost recovery means: the grant pays for the real cost of the post, and the charity keeps the relief.

A practical reason points the same way. The allowance is yearly, it applies to the charity as a whole rather than to one post, and it has to be claimed. A post budget that has already spent it leaves no margin if the claim is late or other staff use it up.

The mandatory cost that sits outside the total

Employers’ Liability insurance is compulsory once you employ someone. It does not appear in the table because it is not a tax or a contribution. It is a premium, and insurers set the price, so no one can give you a figure for it.

What the law does fix is how much cover you must hold. In England and Wales the minimum is £5,000,000 for any one occurrence. Northern Ireland has its own instrument for this, made separately from the Great Britain Act. Check the Northern Ireland rules rather than assuming the same terms. The Scottish position was not recorded against this fact.

So the statutory total above is incomplete. Get an insurance quote before you finalise the budget, and add it as its own line. Choosing the cover is covered on buy the insurance you need. Do not leave it out because it has no fixed number.

Two floors the budget must respect

The post must pay at least the minimum wage for the worker’s age. For workers aged 21 and over that is the National Living Wage, currently £12.71 an hour. The rates change every April. Check that the salary still clears the floor at the point the grant ends, not only when it starts.

The second floor is time. Every figure here is set for one tax year. If the grant runs across several years, budget each year with the rates as they stand. Say in the application that statutory rates may rise. Put a diary note on the first working day of April to check them.

Carrying it into the application

Use the statutory total, plus the insurance line, as the cost of the post in every application for it. Then add a share of your overheads, which is the other half of full cost recovery. The funding hub covers that from the funder’s side: calculate the project’s full cost, including core costs. If you are building your first charity-wide budget at the same time, Build your first annual budget shows where the post sits in it.

Once you know what the post costs, the next question is what kind of engagement it is. That changes the cost again, which is the next step: decide the status: employee, worker or self-employed.

Common mistake: budgeting the salary as the cost of the post

Salary is the number on the job advert and the grant form, so it is the one that gets written down. Employer National Insurance and the employer pension sit on top of it. A charity that budgets the gross salary alone has under-budgeted before the post-holder starts.

Common mistake: working out the employer pension on the whole salary

The percentage — 3% from the employer — is quoted without the band it applies to. Contributions are on qualifying earnings — the band between the lower and upper limits — not on the whole salary. It is the most common arithmetic error in charity budgets, and it overstates the cost.

Common mistake: taking Employment Allowance off the cost in the grant budget

It reduces the cash paid to HMRC, so it looks like a saving. It is a National Insurance relief, not a cut in the underlying cost. Budget the gross figure and treat the allowance as cash flow.

Common mistake: assuming public-sector work rules the charity out of Employment Allowance

The public-sector test is the one people have heard of, because it catches commercial contractors. Charities qualify through a separate gateway. A charity that provides NHS or council services is not excluded on that ground.

Worked example

Tollgate Youth CIO applies for a grant to fund its youth worker post and writes the salary into the budget. The salary is the only number on the page.

Suppose the post pays £25,000, the figure the line-by-line cost table uses. The real statutory cost is £28,562.80. Employer National Insurance is charged only above the secondary threshold. The employer pension is worked out on the qualifying earnings band, not the salary. There is no Apprenticeship Levy at Tollgate’s size.

Tollgate can claim Employment Allowance against its National Insurance bill, and a youth charity funded by the council is not excluded for that reason. But it budgets the gross cost and treats the allowance as cash flow. Then it adds an insurance quote for Employers’ Liability cover as a separate line. It also checks that the hourly rate stays above the National Living Wage for the whole grant.

The result is a full-cost line that goes into every application for the post. A diary note records that every figure in it changes in April.