The Employment Allowance – England

The Employment Allowance will cut up to £2,000 from the employer National Insurance Contributions of the vast majority of employers.

Announced in the 2013 Budget and effective from 6 April 2014, the Employment Allowance cuts £2,000 from the employer Class 1 National Insurance Contributions (NICs) of most employers. It’s thought that around 1.25 million businesses and charities will benefit, whilst about a third of all employers will see their NICs bill completely abolished. Due to this allowance, a business employing ten adults at the National Minimum Wage will receive a tax cut of over 40%. 

How Does it Work?

Through this allowance, businesses can cut the first £2,000 from their NICs bill every tax year. If the business’s total employer Class 1 NICs bill is less than £2,000 per year, they won’t pay anything, whilst if it is above this level, they will simply pay the difference. The allowance does not affect employees Class 1 NICs.

The Employment Allowance can be claimed by simply ticking the relevant box in your payroll software. It is effectively a ‘discount’ on your tax bill as opposed to a cash sum.

Eligibility and Claiming

The vast majority of businesses who pay employer Class 1 NICs on their employee and director earnings will be eligible for this allowance.

Nevertheless, there are a few caveats. If, for example, a company is part of a group, only one of the group’s companies will be entitled to claim the allowance. Similarly, those businesses which run more than one PAYE scheme may only claim against one of them.

There is a list of further exclusions, some of which include domestic of household staff such as gardeners and au pairs. This can be seen on the government website.

The allowance can be claimed up to four years after the end of the tax year it relates to (from 2014/15). HMRC will set the allowance against any liabilities unless a repayment is requested.

Example

An employer who pays their employees on a monthly basis and has a total employers Class 1 NICs liability of £400 per month will pay no employers Class 1 NICs for the first 5 months of the year (£400×5=£2,000). After this, the normal employers Class 1 NICs will be paid as usual.

Time Limits

The allowance does not necessarily need to be claimed at the beginning of the tax year. It could for instance be beneficial for a business which experiences seasonality to use the allowance in quieter trading months. However, the maximum you can claim in any one tax year is the lesser of the total of your employer Class 1 NICs and £2,000.

Record Keeping

Any records relating to the allowance must be kept for at least three years after the end of the tax year in which the allowance was claimed.