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 £4,000 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.
Another qualifying condition is that your employers’ Class 1 National Insurance liabilities were less than £100,000 in the previous tax year.
If you’re part of a group of companies (also known as connected companies), the total employers’ Class 1 National Insurance liabilities for the group must be less than £100,000. Only one company in the group can claim the allowance.
In addition to this, there is also a list of Excluded Employers and Employees.
You also cannot claim if both of the following apply:
- you’re a company with only one employee paid above the Class 1 National Insurance secondary threshold
- the employee is also a director of the company
Certain employees cannot be included in your claim, such as:
- someone whose earnings are within IR35 ‘off-payroll working rules’
- someone you employ for personal, household or domestic work (like a nanny or gardener) – unless they’re a care or support worker
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 £4,000 is used up for a tax year.
What is involved
Taking this option means you may 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 any payments due. 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 may be 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, there may be no tax advantage in using it. However there is a potential tax saving, 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.