Employment Allowance restriction – another tax blow

The Employment Allowance reduces the National Insurance costs for most employers, including contractor limited companies. However, this is all set to change from April 2016 when many contractors will not longer be eligible to claim it.

We asked Tauseef Tariq, tax accountant at contractor accountancy firm ADVANCE, to answer some of our questions relating to the Allowance in general, and to explain further how a proposed legislative change represents one of four looming tax hikes for contractors.

What is the Employment Allowance?

Introduced by the coalition government in April 2014, the Employment Allowance represents an attempt to boost job creation amongst small and medium-sized businesses. Under the scheme, employers can reduce the amount of National Insurance Contributions (NICs) they pay for their employees by up to £2,000.

This limit will be increased to £3,000 from April 2016 for those eligible to claim the Allowance.

The scheme is open to nearly all employers that pay Class 1 NI on their employees’ and directors’ earnings. According to the Government, an estimated 450,000 businesses and charities will not have to pay any employer NICs at all as a result of the scheme.

Can you use the allowance if you are caught by IR35?

No. Personal service company (PSC) owners/directors with deemed payments of employment income under IR35 are ineligible. The allowance cannot be claimed against such payments. The exclusion also applies to contracting businesses captured by Managed Service Companies (MSC) legislation.

What are the new restrictions from 2016?

Currently, a contractor operating as a personal service company (PSC) is able to offset the allowance against employers’ NIC arising on ordinary salary. So, as things stand if you pay yourself any salary and pay any employers’ NIC on that salary you can claim the allowance.

However, George Osborne announced in the 2015 Summer Budget that the allowance would be withdrawn for companies where the director is the sole employee from April 2016. The Chancellor’s changes mean that many contractor limited companies will no longer be eligible to claim the allowance.

Can self-employed sole traders take advantage of the scheme?

Yes, but only if they employ someone and have an employers’ NIC liability as a result. It is worth re-emphasising that the allowance is only for your employers’ Class 1 NIC liability – you cannot use it against Class 1A, Class 1B or Class 4 NIC.

If eligible, how do you actually claim the allowance in practice?

In most cases, this will be done through your payroll software provider’s Employer Payment Summary (EPS) facility. Alternatively you can download HMRC’s Basic PAYE Tools software.

Further Information

• It is worth noting that employers can only benefit from this Allowance if they actually pay themselves (or other employees) salaries above the prevailing Secondary National Insurance threshold, which is £8,112 (£156 per week) in 2015/16.
• Read our original article on the Employment Allowance, from April 2014. This includes an example calculation of how contractors can save hundreds each year via the Allowance, after taking into account the effects on Corporation Tax of taking a salary above this NIC threshold.
• Read the official guide to the Allowance on GOV.UK.