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Where Taxpayers and Advisers Meet

Converting costs - employed income vs 'sub contractor / self employed'

WD
Posts:4
Joined:Fri Jan 24, 2014 2:23 pm
Converting costs - employed income vs 'sub contractor / self employed'

Postby WD » Mon Aug 30, 2021 11:23 pm

Hi all,

I'm looking at taking on an employee on an hourly rate. At the moment I use a couple of skilled self employed / sub contractors who sometimes invoice for a days labour as well as for full jobs done. I know what they charge and what I can afford. This can normally be between £120 and £160 a day. My question is, how do I work out what I can offer to pay if I employee one of these people full time?

If I am being asked for £15ph with overtime at time and a half, plus 4 weeks holiday p/y, how can I translate that to what a sub contractor may invoice me for a days labour?

Ideally I need an equation to work out what it will cost me per 9 hour day to offer someone £13ph or £15ph on a full time basis including 4 weeks holiday being taken into account - and obviously taking into account tax, NI and pension contributions. Overtime? - if that can be explained what affect that has in terms of tax, NI and pension contributions then that would also help.

Hoping someone can give me an equation which would allow me to enter the hourly rate, 4 weeks holiday, what the tax, NI and pension contributions would be and give me a figure which I can compare to the sub contractor amounts.

I know sick pay is also a consideration.

Thank you for any help and advice.

WD
Posts:4
Joined:Fri Jan 24, 2014 2:23 pm

Re: Converting costs - employed income vs 'sub contractor / self employed'

Postby WD » Wed Sep 01, 2021 9:27 pm

Hi,

Would anyone be able to help - or possibly point me in the right direction for finding out? I can do the maths, it's knowing the percentages / rates etc of the various tax / NI etc over the course of a year that I need to take into account.

Thank you.

someone
Posts:521
Joined:Mon Feb 13, 2017 10:09 am

Re: Converting costs - employed income vs 'sub contractor / self employed'

Postby someone » Thu Sep 02, 2021 7:36 am

Hi,

Would anyone be able to help - or possibly point me in the right direction for finding out? I can do the maths, it's knowing the percentages / rates etc of the various tax / NI etc over the course of a year that I need to take into account.

Thank you.
I am not an accountant or employer so I've almost certainly got things very wrong but this might cover the basic outline:

You need to give 5.6 weeks per year of holiday - for a full time employee on a five day week that works out at 4 weeks holiday plus 8 bank holidays (or 28 days holiday but work bank holidays)

So assuming 5 day a week employee 8 hours per day and assuming you pay them 15 per hour including for their holidays:

You will pay them 15*8*5*52=31200 per year. You don't need to worry about their tax/NI in the calculation etc as 31200 will be your total cost for this part, some you will pay to them and some to HMRC.

You will need to pay their auto enrolment pension. I think the minimum you have to pay if they don't opt out is 3%. Close enough to another 1000 for you.

Then you will have to pay employers NI. If I understand correctly you will pay 13.8% on everything over 8840, another 3085.

I'm probably missing something but that all comes to 35221.68.

Now the employee is actually working 8*(52-5.6)*5=1856 hours - so the effective hourly rate you are paying is 35221.68/1856 = 18.97 pounds per hour.


I think, but I'm not 100% sure, that if they work regular overtime then you need to include that in their holiday pay. I don't know about the 3% pension contribution but assuming that has to go up too:

Overtime per hour = 15*1.5*1.168*(52/46.4) = 29.45 effective hourly rate.
1.168 is 13.8% NI and 3% pension
52/46.4 allows for the money you'll have to pay them during their holidays.

(Effective hourly rate is the cost to you if you paid them per hour they worked but didn't pay them for holidays. Effectively what you have to do is "bank" the difference between what you actually pay them and the effective hourly rate so that you've got the money to pay them when they're not working.

I'm 99% sure you'll need to use a payroll provider (or possibly your accountant) to employ someone. There are very strict rules about how and when you have to report all this to HMRC and my gut feeling is that it isn't worth even trying to do it yourself unless you've got many employees and your own payroll department (if you read the various accounting websites you'll see constant queries about how HMRC has got it wrong and how to correct it - and this is from people who do payroll for a living!). I would guess that any reputable firm who might want your business if you do employ someone will generate some example scenarios for you so you can see what it will actually cost you, including their fee.

I would hope (but I don't know) that any reputable provider will also warn you about upcoming changes - for example the 3% pension stuff that is relatively new - otherwise you're going to have to keep on top of any and all legislative changes too.

One thing to consider too, I believe it's your legal obligation to ensure that your employees take their minimum (5.6 weeks) holiday per year. You cannot make payment in lieu of holiday unless they've already taken the legal minimum days.

Whatever you do, don't rely on anything in this post to make any decisions - Everything in this post is based on theory, not practice and I don't have the experience to be able to say "that can't be right" when looking at these numbers. I could be massively out in either direction (either because I've missed something, misunderstood something, or made a silly mathematical error) and I wouldn't be able to tell.

WD
Posts:4
Joined:Fri Jan 24, 2014 2:23 pm

Re: Converting costs - employed income vs 'sub contractor / self employed'

Postby WD » Sat Sep 04, 2021 6:29 pm

Thank you someone for taking the time to reply. I appreciate your caveats as not taking it as gospel.

I've just skimmed through and will sit down later and follow your maths properly and see if it makes sense to me also.

I would have thought there has to be a way of working out the equivalent employed vs sub contractor costs - hopefully you've provided me with it. You've certainly given me more information than I had, so thank you for that.

I do wonder if I am missing something though, or if there is no real way to work it out as of the lack of responses (not a dig - just not sure if I'm missing something). There must be a way that if I say I can afford to pay out £120 or £160 for every working day then what that would come down to on an hourly employed basis. As you point out - I need to be sure before I make a decision!

Again, I'll have a proper look through and thank you for taking the time to help me out.


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