In January this year the Government announced that they will be increasing the annual ‘Employment Allowance’ for businesses from £2000 to £3000, from April 2016. In our latest post we explain what it means to your business and what steps you need to take to claim your allowance if you are eligible.
What is the Employment Allowance?
Employment allowance (now £3000 per tax year) is an incentive given to employers to take on staff by reducing their liability for Class 1 secondary National Insurance Contributions (NICs). So as an employer, the allowance will reduce the amount you have to pay to HMRC each time you run your payroll until the £3,000 has been used. At which time you will have to pay the full amount of NICs owing each month until the tax year ends.
You may claim the employment allowance even if your National Insurance Contributions for the tax year don’t reach £3000. You cannot however, use the allowance against Class 1A or Class 1B NICs liabilities.
How does it help an Employer?
The allowance is designed to help businesses to retain or take on new employees by reducing the national insurance contributions they have to make as an employer. Previously, from April 2014, the allowance was set at £2000 per year which took some of the financial pressure off smaller businesses so that, for example, they could employ four people on national minimum wage without having to pay any employer NICs.
The 2016 increase in the Employment Allowance, takes into consideration the recent increase in the minimum wage, so enabling the same business to continue to employ those four people on minimum wage and still remain under the £3000 allowance for NICs.
Who is Eligible?
Businesses, Charities, CICs and Community Amateur Sports Clubs who pay employers’ Class 1 National Insurance are eligible, however there are some exemptions.
You can’t claim if:
- You are the Director of the Company and are the only paid employee in your Company.
- You employ someone for personal, household or domestic work (eg a nanny or gardener) – unless they’re a care or support worker.
- You are a Business or Public Body doing more than 50% of your work in the Public Sector, for example NHS and Local Councils can’t claim. Charities are exempt from this.
- You are a service company with only deemed payments of employment income under ‘IR35 rules’. IR35 is a tax legislation designed for contactors who do not fall under the usual ‘self-employed’ rules for tax and NICs. You can find out more about this here.
- You are a charity that is connected to another charity. Only one charity can claim the allowance and it is up to both charities to decide who will claim.
How to claim Employment Allowance
There are a number of ways that you can do this. If your payroll is dealt with by an external company or accountant, they should have claimed the allowance automatically through the payroll software they use on your behalf. If you haven’t claimed any employment allowance before you can also claim for a previous tax year, dating back to 2014 again this can be done through your providers’ payroll software.
If you run your own payroll then there are a couple of ways to claim the allowance:
- Through your Payroll Software – As an employer you can easily claim your employment allowance through your payroll software. Even if it is a HMRC recognised system you will still need to check that it can send an ‘Employer Payment Summary’ (EPS) report. Next time you send your EPS to HMRC, there is an ‘Employment Allowance indicator’ field in which you mark ‘yes’ this will then ensure the allowance is taken into consideration in the calculations.
- Using HMRC’s Basic PAYE Tools – Once you have selected the correct name in the ‘Employer’ menu on the home page, you will need to ‘change employer details’, mark ‘yes’ in the Employment allowance field and then send your EPS as you normally would.
You can find below further information about this topic which should answer other questions you may have:
- Do I have to reclaim the allowance at the start of every tax year? – No. You only need to claim for the allowance once. At the beginning of the next tax year, it will automatically start again, and will repeat until you indicate that you are no longer eligible.
- Does it matter when I claim the allowance? – No. You can claim it at any time in the tax year. However if you claim it late in the year, you will need to request that the unclaimed allowance is used to pay off any tax or NICs that you owe. If you don’t owe any then you can request a refund from HMRC.
- How can I see how much of the allowance I have used? – Login to your online HMRC Account and it will show the amount of any unused allowance you have. Alternatively, your payroll provider or software will also confirm the amount.
Need a Hand?
Here at First Call Financials we can help with any aspect of your employer allowance whether we run your payroll for you or not. If you would like any help or advice on your allowance or any other aspect of tax, NICs or payroll – please give us a call on 0117 3790810.
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This post was written by Steph Roffey