The Employment Allowance reduces the National Insurance employers pay by up to £5,000 per year. So, can your limited company benefit from this incentive in 2024/5?
Employment Allowance – The Basics
The scheme was implemented to help stimulate economic growth and encourage small firms to hire more employees.
It is open to all businesses with a total NI bill of £100,000 or less during the previous tax year.
By using the scheme, a company can write off the first £5,000 of its Employers’ NIC bill each year.
The Allowance is ‘claimed’ monthly via your firm’s payroll process as the liability arises.
So, Employers’ NICs are not payable until your company has used up its entire £5,000 allowance.
Employment Allowance eligibility for limited companies
- 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 has one or more employees, at least one other person, in addition to the director, must be paid above the secondary NIC threshold of £9,100 per year 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, you can claim the EA if you and your spouse are directors and earn above the secondary Class 1 NIC threshold.
Things to consider when setting salary levels
Your company will only benefit from this government measure if it pays salaries to directors and employees, which incur employers’ national insurance.
As salary levels increase, income tax and Employees’ NIC liabilities also rise, so there are several things to consider when setting the ideal salary level.
- The Personal Allowance (the amount you can earn before paying any income tax) is £12,570 in 2024/5.
- You don’t pay any Employees’ NICs if your salary is beneath the Primary Threshold.
- Your company pays Employers’ National Insurance at 13.8% on salaries above the Secondary Threshold of £9,100 per year.
Find out what the most tax-efficient director’s salary is for 24/25 here.
Employment Allowance 24/25 – £12,570 salary
If your company can claim the EA, is it worth paying the director(s) a £12,570 salary during the 2024/5 tax year, compared to £9,100?
Tax | £9,100 Salary | £12,570 Salary |
---|---|---|
Income Tax | Nil | Nil |
Employers’ NICs | Nil | Nil (£478.86 refunded by EA) |
Corporation Tax saved (minimum) | £1,729 | £2,388.30 |
Corporation Tax difference | Nil | £659.30 |
Net Saving to Company | Nil | £659.30 |
Employees’ NICs (paid by director) | Nil | Nil |
- If the company pays its director(s) / employees(s) a £12,570 salary, its £478.86 Employers’ NI bill per employee is offset thanks to the EA.
- No Income Tax is payable on either salary in the table above, as the Personal Allowance for 2023/24 is £12,570.
- By paying a salary of £3,470 more than the £9,100 salary level, the company also saves a minimum of £659.30 in Corporation Tax per employee. The savings will be greater if your profits are above £50,000 per year.
- The employee has no employees’ NICs to pay.
- In these examples, we assume that your total personal income is less than £100,000, as the £12,570 personal allowance is eroded by £1 for every £2 you earn above £100,000.
- The EA has to be claimed every year in order to receive it, and relief can no longer be carried over between tax years, as it has been in previous tax years.
Further Information
- 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.
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