How much you cost your employer

03 June 2010
One of the things you notice when moving from student to work life is the large increases in taxes. The other thing is that being employed is actually quite expensive. I rashly said I would do the calculations, and since someone held me to them, here they are. Most of these figures are based on what an online calculator returned, although I am not convinced the figures returned are entirely accurate.

One thing that you notice quickly is that calculating PAYE taxes is actually quite complex. Multiple components, each having their own thresholds & bands, and there is not even a base-line figure from which they are all calculated. No wonder PAYE is expensive to administer, but that is a separate issue..

Gross salary: (£2,000 per month)

£24,000 (i.e. £2,000 per month) is supposedly around the mean/median starting salary of a fresh graduate, and a nice round figure. Since this article is about tax and not graduate prospects, I will leave discussion on the realism of this figure aside for now.
Income Tax: £292.08
20% of income above the £6,475 personal allowance threshold, which works out as 14.6% of gross salary. Not bad going for a tax devised to defeat Napoleon.
Employee's NI: £167.57
Employee's National Insurance is basically a second income tax, and is an extra 8.4% you don't ever get to see (well, not for the next 45 years, at least).
Employer's NI: £195.07
Whereas employee's NI is basically extra income tax (i.e. a deduction), employers also have to pay extra that is on top of (and proportional to) your gross salary. I'm not exactly sure what formula is used to calculate this, as it has various gotchas such as the subtle difference between "monthly" and "4-weekly" salaries, and there is some lower and upper threshold on income that is considered. I just plugged some values into HMRC's NI calculator, and it works out as an extra 9.8%.
Council tax: £97.92
If you've got more than £16,000 assets (this includes illiquid things such as cars and shares, as well as all savings), you are expected to sell them at a loss and pay all your council tax. This is all the more grating as council tax has to be paid out of nett income.
For Bristol City, Band D Council tax is an unusually high £1,567 (Berkhamsted has £1,457, and much of London is nearer £1,100). Assuming a single adult discount (25%) this works out as 4.9% of gross salary, and 6.7% of nett salary.
Student loan: £67.50
9% of income above £15000 goes to repaying this, which accounts for 3.4% of the gross £25,000. Low in terms of overall salary, but quite high in terms of extra salary you get from your degree.

Nett salary: £1,375

Yep, 31.3% (£625) gone in direct taxes. More goes in indirect taxes (VAT, Fuel Duty, etc) and most likely there is rent as well, but for now I am leaving those aside. However, we were really interested in the employer's cost..
£1.60 for every pound
For you to earn £1,375 has cost your employer £2,195, which works out at 159.7 pence for every pound you get to spend.
.and the marginal rate
Now lets assume a gross salary of £28,000 (£2,333 per month), which works out as a nett £1,575 per month, at a cost of £2,571. Hence an extra £200 cost an extra £376, or 188 pence per pound.

And all this means..?

Given a high cost, there are two rational courses of action, both of which spell bad news for graduates:
  1. Try to squeeze the costs
  2. Reduce associated risk
I have seen web design jobs going for £17,000 in Camden Town (not the cheapest of places), and given that getting graduate job gets rapidly more difficult the longer after graduation, I know there are people out there would would take it. Now also guess why no-one is using agencies any more.

Graduates (and postgraduates) are naturally also more of a "risk" to employers than someone who has been employed for a year or so, and when the job-market is lean salaries are deflationary. Those on a 2nd or 3rd jobs are also more likely to be objective in what they want out of a company, and less emphasis needs to be placed on text-book recruitment selection methods which are as questionable as they are scalable. Now guess why youth (18-25) unemployment is running at 20%, and applications for postgraduate MSc's increased circa 30% last year.