You may have seen promotional material from the Government recently concerning the imminent launch of the Employment Allowance – you may even have received an email about it. This new scheme, launching in April 2014, allows certain businesses to forego their first £2,000 of Employers National Insurance contributions, meaning around 450,000 of the UK’s smallest businesses will no longer have to pay Employer NICs at all.
— HM Treasury (@hmtreasury) March 6, 2014
Who is eligible?
All employers who pay Class 1 National Insurance on their employee’s earnings are eligible for the scheme – however most freelancers and contractors (who pay Class 2 and Class 4 NICs) cannot use the Allowance. You also cannot claim the Employment Allowance if you:
- Personally employ someone for domestic work (e.g. a nanny or gardener)
- Provide services in the public sector
- Provide services (e.g. IT contracting) to a public sector body
What are the rules?
Unlike other HMRC giveaways (for example staff Christmas parties) which are one-time exemptions, the Employment Allowance is just that – an allowance. Eligible businesses may use up to the £2,000 limit every tax year. Employer National Insurance contributions are charged at various rates, but a full-time employee with a salary of £22,000 will incur Employer NICs of £161.51 per month, or £1,938.12 per year.
This means a company with one employee paid £22,000 per year can write off their Employer NICs entirely, as their payments are under the £2,000 Allowance. By comparison an employee paid £27,000 per year will generate £2,628.12 in Employer NICs per year. Under the Employment Allowance, the first £2,000 can be written off, leaving £628.12 payable for the tax year.
Note that Employer contributions above £2,000 will only be paid once the Employment Allowance has been exhausted, so in the example above you would pay no Employer NICs for the first nine months of the tax year, £190.10 in the tenth month, and £219.01 for the eleventh and twelfth month to total £628.12.
Also note the Employment Allowance is a £2,000 allowance per business, not per employee. You can find a calculator to work out your company’s contributions here.
How can I claim the Allowance?
For eligible businesses, the Employment Allowance will be automatically subtracted from Employer NICs by their payroll software. For Crunch clients with payroll, this will happen automatically too.
Why aren’t the self-employed eligible?
Unfortunately this is another Government policy that overlooks the vast majority of small businesses – freelancers and contractors. As the self-employed pay Class 2 and Class 4 National Insurance Contributions they are not eligible for the Employment Allowance.
How much impact will this scheme have?
The Government estimates 1.25 million businesses will be able to take advantage of the Employment Allowance. If every one of these businesses uses the Allowance correctly a total of £2.5 billion will be wiped off the tax bills of UK businesses. It’s worth noting many of the Coalition Government’s business support schemes have has much lower uptake than predicted, but a huge marketing campaign combined with support from payroll software providers should see the Employment Allowance used widely.