What is the Employment Allowance?
The Employment Allowance (EA) gives employers the option to claim up to £2,000 each year to reduce their National Insurance (NI) bill. Employers can only claim the EA against their Class 1 Secondary Contributions (Employer’s NI), up to the maximum amount of £2,000. You can still claim if your Employer’s NI bill is less than the £2,000 allowance but cannot carry any excess over to the next tax year.
Who can claim the allowance?
If you have a limited company and have any employees (including the director) you are eligible to claim the EA but you cannot claim if you are employing somebody for personal, household or domestic work such as a nanny or gardener, unless the employee is a social care worker.
You are only allowed to claim one EA per PAYE scheme and cannot claim for more than one company that is part of a group.
You can claim the EA by submitting an Employer Payment Summary (EPS) via your payroll software.
What is changing from 6th April 2016?
Any limited company claiming the EA will not be eligible to claim from 6th April 2016 if the director is the sole recipient of earnings from their company. The extract from the draft legislation reads:
“The new subsection provides that a company cannot qualify for an employment allowance where all the payments of earnings it pays in a tax year are paid to or for the benefit of one employed earner only who is also a director of the company at the time the payments are made.”
The EA is raising from £2,000 to £3,000 from 6th April 2016 which means employers can save a further £1,000 per year on their NI bill.
Who will it impact?
Any limited company where the director is receiving all earnings will not be able to claim the EA from 6th April 2016.For any limited
company who employs more than just the sole director AND they are in receipt of earnings from that limited company, will remain unaffected and qualify for the additional £1,000 from 6th April 2016
If you are a director of a limited company but the sole earner from that company, you will not be able to claim the EA from April 2016. If you have a second employee, even if they are only employed in an administrative role, the company will still be entitled to claim the EA. You should look very carefully at whether you can justify a second employee, even in a part time role, as this may be of benefit.