On occasion, HMRC provides one-off exemptions to UK companies, for example, tax-exempt staff Christmas parties, whereas the Employment Allowance is just that – an annual allowance to eligible employers of up to £3,000 in a given tax year via a reduction of Class 1 Employer National Insurance Contributions (NICs).
The Employment Allowance was introduced in 2014 to encourage recruitment by UK firms and specifically for small businesses, to stimulate economic growth. In this article we look at how the tax relief works for sole traders and limited company business owners and how to reduce corporate taxes.
How does it work?
The application of the employment allowance is relatively straightforward for employers.
If a company has an employee who earns £22,000, the Employer NIC for the current 2019/20 tax year would amount to £1,873.49 and the full amount would benefit from the Employment Allowance tax relief as if falls within the £3,000 full year allowance.
In contrast, if the same employer paid an employee a £35,000 annual salary, this would generate an annual Employer NIC of £3,667.44, of which the first £3,000 would benefit from the full Employment Allowance tax relief, and would leave just £667.49 left to pay for the tax year. The added benefit here is that the remaining Employer NIC due of £667.49 does not need to be paid until the £3,000 relief has been fully utilised in a given tax year, which means that the employer is not due Employer NIC for the first nine months, with the balance due for payment over the remaining 3 months of the tax year.
Are you eligible?
It is worth remembering that the £3,000 employment allowance is per business not per employee.
In addition the self-employed, in other words, those who pay Class 2 and Class 4 Employer NICs which mainly includes freelancers and contractors, are unfortunately not eligible for the tax relief. So to be clear, only limited companies, who pay Class 1 NIC, can claim.
There are also additional employers who are not eligible, including:
- If you provide services to the public sector – unless you are a charity
- Domestic services are not included, for example, a gardener or an au pair, social and care workers are an exception
- If you are a sole director with no additional employees
- If you do have one or more employees, at least one employee, not including the director, must be paid at least £8,632 annually, in other words, they are paid above the secondary NIC threshold
Furthermore, the rules are changing from 2020/2021 starting 6th April 2020, where only small businesses with a NIC bill of up to £100,000 will be eligible.
How do I make a claim?
Employment Allowance should be built into the payroll process for eligible businesses via payroll software in-house or more likely via your accountant’s payroll software and as already noted, no Employer NIC is liable until the full £3,000 allowance is used up.
How to take full advantage of Employment Allowance
To take full advantage and qualify for Employment Allowance, you will need to pay yourself and your employees high enough salaries, whilst also being mindful that as salaries increase the income tax liabilities will rise.
Employer NIC is only due on salaries above the ‘secondary threshold’, in other words, salaries above £8,632 and this is at a rate of 13.8%.
For more information, you can visit GOV.UK.
We can help
Often there is a requirement for forward tax planning to take full advantage of the tax reliefs available to you and your business. We strongly recommend you speak with a tax and accounting specialist like Mirandus Accountants, who can show you how to reduce corporate taxes. We offer accountancy services for small business and you can contact us to help us tailor a solution to your unique business circumstances.
Mirandus Accountants supporting local businesses in the City of London and Greater London area, providing accounting and tax services to SMEs and OMB clients and access and training on QuickBooks.