The Employment Allowance reduces the amount of National Insurance employers have to pay by up to £3,000 per year. So, can your limited company take advantage of this tax incentive?
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 £3,000 of its overall Employers’ NIC bill each year (from 6th April 2016; previously the limit was £2,000).
The Allowance itself is ‘claimed’ each month via your firm’s payroll process, as the liability arises. So, no NICs are payable until your company’s entire £3,000 allowance has been used up.
The Government expects 450,000 small firms to benefit from the scheme, with around one-third of them paying no Employers’ NICs at all as a result.
Which businesses are ineligible?
- You can only claim the Allowance if you pay Class 1 Employers’ National Insurance Contributions – as limited companies do.
- The self-employed are ineligible, as they pay Class 2 and Class 4 Contributions
- 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 payments (see below for an example).
- Significantly, from April 2016, sole director companies with no additional employees will no longer be able to claim the Allowance.
How do contractors benefit?
Importantly, you will only benefit from this Government measure if you pay yourself a high enough salary on which to incur and claim back Employers’ NICs.
And, as your salary increases, your liability for income tax, and Employees’ NICs rises, 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 £11,500 from 6th April 2017, and you don’t pay any Employees’ NICs at all if your salary is £8,164 or less during the 2017/18 tax year (this is known as the ‘Primary Threshold’).
Employers’ National Insurance is payable on all salaries paid above the ‘Secondary Threshold’ of £8,164 per year, at a rate of 13.8%.
£11,500 salary – How the Employment Allowance works in practice
If your company is eligible, is it worth taking a £11,500 salary during the 2017/18 tax year, compared to taking £8,164?
|Tax||£8,164 Salary||£11,500 Salary|
|Employers’ NICs||Nil||Nil (£460.37 refunded by EA)|
|Corporation Tax saved||£1,551||£2,185|
|Corporation Tax difference||Nil||£633.84|
- If you pay yourself a £11,500 salary, your company’s £460.37 Employers’ NI bill will be refunded thanks to the EA.
- No Income Tax is payable on either salary, as the Personal Allowance for 2017/18 is £11,500.
- By paying yourself £3,336 more than the £8,164 salary level, your company also saves £633.84 in Corporation Tax.
- However, you also have an additional Employees’ NI bill to pay of £400.32.
- So, you will be better off to the tune of £233.52 by taking a £11,500 salary in 2017/18, compared to a £8,164 salary, assuming your company is eligible to claim the EA.
- We have assumed in these examples that your total income is less than £100,000, as the £11,500 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 (or more likely, your accountant’s) should then calculate the remaining allowance each month until it has been fully utilised.
- 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.