National Insurance Employment Allowance

As you may have seen in our latest 2014 edition of ‘Financial Perspectives’, H M Revenue and Customs (HMRC) are introducing a new National Insurance (NI) Employment Allowance with effect from 6 April 2014, worth up to £2,000 per tax year for each employer.

The Allowance is in respect of Employer’s Class 1 National Insurance Contributions only and will be available to most employers whether you are a business or charity (including Community Amateur Sports Clubs) which pays employer Class 1 NI contributions on employees’ or directors’ earnings. There are a small number of employers which 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.

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.

The Allowance can be claimed from April 2014 onwards and you can use your 2014/15 payroll software or HMRC’s Basic PAYE Tools 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 £2,000 by July 2014 (four months’ worth).  If you don’t start claiming until say August 2014, you are entitled to the whole £2,000 in August. In such circumstances HMRC will also allow you to offset the £2,000 against August’s employee Class 1 NI liabilities and PAYE tax liabilities for that month and carry forward any excess if the whole £2,000 is not used.

If your employer Class 1 NI liabilities are less than £2,000 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 2015 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.

For small owner managed limited companies, director/shareholders have often chosen to receive relatively small salaries from their companies and to ‘top up’ their income with dividends.  The salary can be set at a level at which no employer’s or employee’s NI contributions are payable but at which the director(s) should still receive an NI credit for State Pension and other benefit purposes.

The introduction of the NI Employment Allowance may mean that such directors wish to consider receiving a larger salary from their companies to make use of at least some of the Allowance.  If the salary is increased to trigger employer’s and employee’s NI liabilities then the employer’s NI liabilities could be covered by the Allowance and the employee’s NI liabilities suffered could be outweighed by the additional Corporation Tax relief which should be available on the increased director’s remuneration. 

Further information is available online at www.gov.uk/employment-allowance but if you have any queries then please contact me or any of our offices and we would be pleased to help.

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