The Employment Allowance reduces the amount of National Insurance employers have to pay by up to £4,000 per year. So, can your limited company benefit from this tax incentive?
Employment Allowance – The Basics
The scheme was implemented to help stimulate economic growth and encourage small firms to take on more employees.
By using the scheme, a company can write off the first £4,000 (from April 2020) of its overall Employers’ NIC bill each year.
The Allowance itself is ‘claimed’ each month via your firm’s payroll process, as the liability arises. So, no Employers’ NICs are payable until your company’s entire £4,000 allowance has been used up.
Is your limited company eligible to claim the EA?
- You can only claim the Allowance if you pay Class 1 Employers’ National Insurance Contributions – as limited companies do.
- The self-employed are ineligible to claim against any profits they draw down personally, as they pay Class 2 and Class 4 Contributions. However, they can claim if they have employees and make Class 1 NICs.
- You cannot claim if you provide services to a public sector body.
- If you are caught by IR35, the Allowance cannot be claimed against deemed salary payments.
- Sole director companies without additional employees cannot claim the Allowance. The whole point of the EA is to encourage firms to take on extra staff! So, if you’re a one-man-band, without employees, your company cannot claim the EA. This rules out a large proportion of professional contractors’ companies.
- If your company does have one or more employees, at least one other person in addition to the director must be paid above the secondary NIC threshold of £8,788 per year (2020/21) to qualify.
- See Section 14 of this Government EA guide which provides examples of when the EA can be claimed by small companies. For example, if you and your spouse are both directors and both earn above the secondary Class 1 NIC threshold, you can claim the EA.
Things to consider when setting salary levels
Importantly, you will only benefit from this Government measure if you pay yourself (and your employees) high enough salaries on which to incur and claim back Employers’ NICs.
And, as salary levels increase, income tax and Employees’ NIC liabilities also rise, so there are several things to bear in mind when setting the ideal salary level.
The personal allowance (the amount you can earn before paying any income tax at all) is £12,500 from 6th April 2020, and you don’t pay any Employees’ NICs at all if your salary is £9,500 or less during the 2020/21 tax year (this is known as the ‘Primary Threshold’).
Employers’ National Insurance is paid on salaries above the ‘Secondary Threshold’ of £8,788 per year, at a rate of 13.8%.
£12,500 salary – How the Employment Allowance works in practice
If your company is eligible to claim the EA, is it worth paying the director(s) a £12,500 salary during the 2020/21 tax year, compared to £8,788?
|Tax||£8,788 Salary||£12,500 Salary|
|Employers’ NICs||Nil||Nil (£512.26 refunded by EA)|
|Corporation Tax saved||£1,669.72||£2,375|
|Corporation Tax difference||Nil||£705.28|
- If the company pays its director(s) a £12,500 salary, its £512.26 Employers’ NI bill will be refunded thanks to the EA.
- No Income Tax is payable on either salary, as the Personal Allowance for 2020/21 is £12,500.
- By paying a salary of £3,712 more than the £8,788 salary level, the company also saves £705.28 in Corporation Tax.
- However, the director also has an additional Employees’ NI bill to pay of £360.
- So, you will be better off to the tune of £345.28 by taking a £12,500 salary in 2020/21, compared to an £8,788 salary, assuming your company is eligible to claim the EA.
- We have assumed in these examples that your total personal income is less than £100,000, as the £12,500 personal allowance is eroded by £1 for every £2 you earn above £100,000.
- The EA is claimed by your company for the relevant tax year. This only needs to be done once; usually via a tick box on the payroll software. Your payroll system should then calculate the remaining allowance each month until it has been used up.
- Although we have taken care in producing this article with help from our own accountants, please ask your accountant if you have any questions about your salary level, and how your company could benefit from the Employment Allowance.
- For more information, visit GOV.UK.