The Employment Allowance is available which can help reduce your employer Class 1 National Insurance contributions (NICs)
The Employment Allowance is available which helps reduce the employer Class 1 National Insurance contributions (NICs) that your company pays on staff salary. If you are eligible, you can reduce your employer Class 1 NICs by up to £5,000 each tax year.
Most of our clients pay a salary below the employer Class 1 NIC threshold, so this allowance is of no benefit anyway, but if the right conditions exist you may want to consider increasing your salary to take advantage of the Employment Allowance.
Are you eligible?
In most cases the answer will be no. The Allowance is not available to single Director companies (ie where there is just one person on the payroll). Furthermore, if another person was added to payroll with the ‘main purpose, or one of the main purposes’ being to get a tax advantage, then the company would also be ineligible for the Allowance. You can see all the details here.
In addition to this, there is also a list of Excluded Employers. If your company is on this list, it is not eligible for the Employment Allowance;
(a) employ someone for personal, household or domestic work, such as a nanny, au pair, chauffeur, gardener, care support worker;
(b) already claim the allowance through a connected company or charity;
(c) carry out functions either wholly or mainly of a public nature, for example NHS services, General Practitioner services, the managing of housing stock owned by or for a local council, providing a meals on wheels service for a local council, refuse collection for a local council, prison services, collecting debt for a government department;
You do not carry out a function of a public nature, if you are:
(a) providing security and cleaning services for a public building, such as government or local council offices;
(b) supplying IT services for a government department or local council;
How to do it
To claim the Employment Allowance you need to pay yourself salary at a level that attracts Employer Class 1 NICs. Through payroll, any Employer Class 1 NIC payment due have the Employment Allowance deducted until the entire £5,000 is used up for a tax year.
What is involved
Taking this option means you will have employees NI to pay each quarter (the Employment Allowance will offset any employers NI). We will email you the details each quarter, you just need to ensure that you make these payments. The net salary payments you make to yourself on the last day of each month will also need to be spot on. We will also send you these details, so you will have everything you need to ensure you make the correct salary and employees NI payments.
Please note though that there are penalties for getting this wrong. If you make an NI payment late, or pay yourself the wrong net salary, there is potential for you collect penalties from the HMRC. You just need to ensure you keep on top of this every month!
Other issues
If you have earnings from other sources of at least £1,000, such as bank interest, other employment, rental income, pension income etc, then the tax advantage of the Employment Allowance is lost. This also applies if you have any taxable benefits, either through your company or from a previous employer of more than £1,000.
Summary
The Employment Allowance is not aimed at contractor companies. Your level of administration increases with the potential of penalties for getting it wrong, and if you have other sources of income for the year, or taxable benefits, worth £1,000 or more, there is no tax advantage in using it. However there is a potential tax saving there of around £205 per year, and we wanted to ensure you were aware of it, and to let you know we will support you with the information you need if you want to go ahead with it.