National Insurance Employment Allowance explained
With a charge rate of 13.8% of most pay, Employer’s National Insurance Contributions are a sizeable cost to businesses of all sizes, but particularly to smaller businesses. In an attempt to remove some of the financial burden felt by these businesses and to reduce the resistance to employ people, George Osborne took an axe to Employer’s NICs in the 2013 Budget.
In this article, we’ll describe what the NI Employment Allowance is, as well as outlining who is eligible and what you need to do if you think your business might qualify.
An initial word of warning
Before singing the praises of this new Bill, which was presented to Parliament in October 2013, it’s important to point out that as of March 2014 it has not yet received Parliamentary seal of approval. Although the official procedures are not yet in place, there has been some disclosure about how it will work and who will qualify, which we’ll share with you here.
What exactly is it?
In a nutshell the NI Employment Allowance will enable companies that fit its predetermined criteria to save up to £2,000 a year on their employer/secondary Class 1 National Insurance Contributions. A huge number of businesses in the UK will become eligible once the bill has been passed and the effect will be a reduced financial burden on employing people.
When will it come into effect?
Assuming that all the relevant points are cleared, the change will come into effect on the 6 April 2014 at which point qualifying employers will see a real reduction in their NI employer’s contributions bill.
Who can claim?
Any business or charity that pays employer Class 1 National Insurance Contributions on employees or directors earnings can claim the Employment Allowance. In the event of your business being part of a group of companies, only one company or charity within the group can claim the Allowance. In effect, this means that you can claim the £2,000 once only, and for only one PAYE scheme, no matter how many schemes you run. It is therefore up to you and, or your payroll provider or accountant to establish which scheme would be best to apply.
How does it work in practice?
Making a claim is straightforward. All you need to do is reduce your employer Class 1 NICs payment by a maximum of £2,000 i.e. the equivalent of the Employment Allowance. This reduction will take effect from the start of the tax year and will be based on your monthly qualifying payments.
So, if for example, your April 2014 employer Class 1 NIC total is £5,000, you will be able to immediately reduce this figure due by the £2,000 Employment Allowance, which means that your remaining payment due will be £3,000. That will conclude your Allowance calculation for the year. However, if you are at the other end of the spectrum and your NIC bill is only £250 per month, then you will qualify for 8 months without payment and then you will recommence payments in month 9 until the end of the tax year. This second scenario will see you benefiting from the Employment Allowance in full, but over an 8 month period, rather than in one single reduction.
What if I don’t use my full Allowance in one year?
If you have only one PAYE scheme and your full Allowance isn’t used up in the year, then it is lost. However, if you have more than one PAYE scheme, and your payments on the other schemes are up to date, you can make a request to HMRC to make a refund of unused Allowance at the end of the tax year. If, for any reason you miss this deadline, you should ask HMRC to offset the remaining balance against future PAYE liabilities.
What does it mean to you?
What this means to you is that the cost of employment will reduce by up to £2,000 per year, thanks to this move introduced by the Government to ease the burden of employing people. Launched in last year’s budget, this Allowance was headlined as the “biggest tax cut” in the budget and is predicted to enable up to a third of all employers in the UK to wipe employer’s NI contributions off their list of charges.
What do you need to do now?
For most employers, their payroll software will take charge of the administration surrounding the NI Employment Allowance and will reduce employer Class 1 NICs for you. When you have done this once, HMRC will automatically carry your claim forward each year, so it’s up to you to make sure your circumstances haven’t changed in the interim. Where paper returns are being used, again the Allowance should be claimed at the start of the tax year using the paper Employment Payment Summary (EPS).
Are any employers excluded?
As we have mentioned already, almost all businesses and charities in the UK will qualify once this bill comes into effect, but like all things there are a few exceptions. Public authorities for example are not eligible. Because the schooling system in the UK is only partly public funded, it is particularly important for those responsible for school payrolls to establish their entitlement or otherwise. Because academies enjoy charitable status, then they will be able to claim, as will independent and private schools.
There is a further area of exclusion that is currently up for debate and that is the area of employment of staff for the provision of personal services e.g. house-keeping, child care, drivers or care workers. At this moment in time these roles are excluded from the scheme, but an appeal has been made to HMRC to reconsider their decision.
If you’d like to discuss the NI Employment Allowance and the effect it may have on your business, why not give us a call on 0800 018 0590?