NIC, Pension and Business Plan

MattG · Mar 14, 2010

Hello,

Together with 3 other people we are preparing a business plan for a start-up student magazine and we were asked to include NIC and pensions (if any) in projected financial statements.

To be honest, I don't quite understand why potential investors would want to know this kind of detail.

As far as I understand, if we offer someone a salary of lets say £20k, all deductions will be from that £20k... so the business itself doesn't incur any additional costs. Am I right??

The only reason I can think of is the cash-flow. If the business deducts NIC and pension from the employee's salary, is this paid to HMRC in the same month or is there some time gap with DOES affect cash-flow??

Thanks!

MASSEY · Mar 14, 2010

There are certain employers that match their employee's pensions, in the some cases i have seen the employers times their pension contributions by 4, maybe they just want to see for themselves what the situation is.

Ray_Stewart · Mar 14, 2010

Employer's NIC is 12.8% on top of the £20,000 so is something you should factor in to your cash flow.

The total of employer NIC, and the employee NIC and PAYE deducted each month from your employee(s), will be paid over either 19th of the following month or 3 monthly if you are a "small" employer which it looks as if you will be.

Tom McClelland · Mar 14, 2010

Employers NIC adds 12.8% to employee salaries.

So someone earning £20,000 a year actually costs their employer £22,560 a year.

Likewise some employers make pension contributions to employee schemes (this can be tax efficient compared with employee contributions)

RAL · Mar 14, 2010

Cost of NIC on a salary of £20,000 would be approx £1828.48, so total employment cost would be £21,828.48 . You may need to add other cost such as pension contribution, benefit in king (i.e. gym membership fees) etc.

Tom McClelland · Mar 15, 2010

RAL said:
Cost of NIC on a salary of £20,000 would be approx £1828.48, so total employment cost would be £21,828.48 . You may need to add other cost such as pension contribution, benefit in king (i.e. gym membership fees) etc.

Indeed, in my brainless weekend state I forgot about the Earnings Threshold.

David Griffiths · Mar 15, 2010

MattG said:
To be honest, I don't quite understand why potential investors would want to know this kind of detail.

The only thing that you need to understand is that they've got money, you want it and you have to play by their rules!

Many lenders have strange requests, but that's life. In the case of investors, it's quite possible that the requests are there to test how thoroughly you've thought things out.

Tom McClelland · Mar 15, 2010

Depending on the nature of the business and the proportion of costs that is represented by employee salaries the loading on employee costs can be a very significant proportion of your anticipated profit. In some businesses things like employers NI, employers pension, holiday pay (by law you must give 5.6 weeks paid holiday per year) are the difference between profit and loss. Between them they can easily add 30% to your wage bill and in many businesses wages are the largest single expense, dwarfing all others.

MattG · Mar 15, 2010

Thanks for all your useful comments and advice. It's much appreciated.

So from you're all saying there is a cost that business incurs by employing a staff other than salaries. I guess it's unfair and illegal to advertise a position for £20k which has that 12.8% NIC already included??

Depending on the nature of the business and the proportion of costs that is represented by employee salaries the loading on employee costs can be a very significant proportion of your anticipated profit. In some businesses things like employers NI, employers pension, holiday pay (by law you must give 5.6 weeks paid holiday per year) are the difference between profit and loss. Between them they can easily add 30% to your wage bill and in many businesses wages are the largest single expense, dwarfing all others.

As it's going to be a student magazine and most costly stuff such as graphics design, printing, accounting, etc will be done by external contractors so we should not have a lot of employees.

Also, I will look it up but maybe some of you know it already and can share it...
Does the same principles apply to part-time stuff and students?
Another debatable thing are freelance journalists. I know we will have quite a lot of them, but it may happen that some may end up writing for every single issue of the magazine. Would it mean we will have to treat them as employees?

Cheers.

Tom McClelland · Mar 15, 2010

MattG said:
Thanks for all your useful comments and advice. It's much appreciated.

So from you're all saying there is a cost that business incurs by employing a staff other than salaries. I guess it's unfair and illegal to advertise a position for £20k which has that 12.8% NIC already included??

As it's going to be a student magazine and most costly stuff such as graphics design, printing, accounting, etc will be done by external contractors so we should not have a lot of employees.

Also, I will look it up but maybe some of you know it already and can share it...
Does the same principles apply to part-time stuff and students?
Another debatable thing are freelance journalists. I know we will have quite a lot of them, but it may happen that some may end up writing for every single issue of the magazine. Would it mean we will have to treat them as employees?

Cheers.

You can advertise a job at any salary you like. But when you make someone a formal offer you have to tell them how much you're actually going to pay them, and it would certainly not be correct to include employers' NI in that figure. Employers' NI is a bizarre tax on employees that is hidden from them, since in effect it is just as much a part of the cost of employing people as all other benefits that they accrue. So for example minimum wage is really about 25% higher than the baseline figure by the time you include employers NI and holiday pay.

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NIC, Pension and Business Plan

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