National Insurance Employment Allowance

As you may have seen in our latest 2016 edition of ‘Financial Perspectives’, the Government have increased the level of the so called “Employment Allowance” so that it is now worth up to £3,000 per tax year for most employers.

As a reminder, the Employment Allowance was first introduced in April 2014 and the recent increase to the Allowance means that most Employers won’t have to pay the first £3,000 of Employer’s Class 1 National Insurance Contributions in the tax year. The Allowance is available to most employers whether you are a business or charity which pays employer Class 1 NI contributions on employees’ or directors’ earnings. There are a small number of employers that cannot claim the Allowance e.g. businesses where their function is one wholly or mainly of a public nature which can include businesses where work is carried out in or for the public sector, for example NHS services and local councils etc. Also, you cannot claim the Allowance if you employ someone for personal, household or domestic work e.g. a nanny or gardener etc. but can claim if you employ a care or support worker.

There are also restrictions on the Allowance for groups of companies/charities or where two or more companies/charities are under the control of the same person or persons, in which case the Allowance will only be available to one company or charity to use against one PAYE scheme and the companies/charities will be able to decide between them which PAYE scheme can claim the Allowance.

Claiming the Employment Allowance

The increased Allowance can be claimed from April 2016 onwards and if you claimed the Allowance in 2015/16 then your Payroll Software (or HMRC’s Basic PAYE Tools) may prompt you to claim the Allowance this year. You will however in normal circumstances have to make an online submission (Employment Payment Summary) to HMRC informing them that you are intending to claim the Allowance.

If you forget to claim the Allowance in April then you can start making the claim later in the tax year. For example, if your employer Class 1 NI liabilities are £500 per month, you could have claimed the whole £3,000 by September 2016 (six months’ worth). If you don’t start claiming until say October 2016, you should be entitled to the whole £3,000 in October.

If your employer Class 1 NI liabilities are less than £3,000 for the year then the maximum claim you can make is the lower sum. For example, if your total employer Class 1 NI liabilities are £1,500 for the year ended 5 April 2017 then that is the most you can claim in the tax year. You cannot carry forward any unused Allowance to future tax years nor claim the difference against other PAYE or NI liabilities.

Change for directors of limited companies

There has been one notable change to the availability of the Employment Allowance this year. With effect from 6 April 2016, limited companies where the only employee paid above the Secondary NI Threshold for 2016/17 is a director, will no longer be able to claim the Allowance.

To illustrate this, take the example of Mr and Mrs A (husband and wife) who own and run Company X, with both of them being Directors of the company and having no other employees. Mr A received a small salary from Company X of just over £8,000 in 2015/16 and intends to receive the same in 2016/17. Mrs A received a salary of £20,000 from Company X in 2015/16 and will do so again in 2016/17. In these circumstances, Mrs A’s salary for 2016/17 will give rise to Employer’s NI payable of around £1,600 for the year. As Mrs A is a director and the only employee paid above the Secondary NI Threshold for 2016/17 (£8,112), Company X will not be entitled to claim the Employment Allowance and will be required to pay the NI of £1,600. Contrast this with the positon for 2015/16 where the Employment Allowance would have been available so would have fully covered the NI payable.

However, all is not lost. Surprisingly, the legislation provides that, where there are two or more directors (or an employee and director) both paid above the Secondary Threshold for 2016/17, the Employment Allowance can be claimed. Therefore, in the above example, if Mr A were to increase his salary for 2016/17 to say £8,500 (anything above £8,112 would be sufficient), the Employment Allowance can be claimed in full so would completely cover the Employer’s NI otherwise payable on Mrs A’s salary (and the small amount of Employer’s NI payable on Mr A’s increased salary).

This can provide some helpful planning opportunities for owner managed companies with no other employees, or employees that are paid below the Secondary NI Threshold. However, no two companies are likely to be in the same position so the facts of each case need to be carefully considered and we would be happy to provide advice. We offer free initial consultations at any of our offices so please do not hesitate to contact us to arrange a meeting.

The above is for general guidance only and no action should be taken without obtaining specific advice