Employment Allowance is a new allowance for employers, with effect from 6 April 2014.
At its simplest its a £3,000 (£2,000 in 14/15 and 15/16) deduction from Employers NI costs incurred by employers, however the devil, as always, is in the detail.
Note this is Employers NI only, not Employees NI which needs to be deducted and paid over still.
Although its introduction was advertised widely by the Government, somewhat disingenuously the parallel change of removing employers SSP recovery wasn’t advertised – Employment Allowance was intended to compensate employers for this. Briefly under SSP an employee is entitled to £89.35 (17/18) for up to 28 weeks, after a 4 day qualifying period. This is paid to employees by employers via payroll, but historically most employers (those classed as “small” in terms of payroll size) could recover all or part of this from HMRC by deduction against PAYE/NI – not any more after the introduction of Employment Allowance. NB this is just a SSP restriction, SMP and related entitlements are recoverable by employers. More on SSP
Most employers are entitled to the allowance. Significant exceptions are:
- domestic employers (eg for a Nanny)
- service Companies in respect of an IR35 deemed payment – more details on excluded employers
- from 16/17 companies with only one employee who is also a director (one non director, or two directors is fine)
Of note here is that some people have suggested this means the allowance isn’t available for PSCs in IR35 caught cases – this isn’t the case. Its not available where a deemed payment is made for IR35, but this is a situation of last resort. The normal practice in an IR35 caught situation is to pay an IR35 compliant salary (95% of income less direct expenses), and in such a case Employment Allowance is still available.
In respect of the restriction for single director companies 16/17 onwards, the restriction applies where the company is only liable to pay Employers NI for one person and that person is a director. This means that a director and one other (including spouse working in the business), so long as both are above the Employers NI threshold, or two directors above the Employers NI threshold, both trigger the allowance. The question arises as to whether its worth inflating spousal salaries to trigger the allowance? Possibly, but at the risk of being seen to be provocative. HMRC do have anti avoidance legislation at their disposal, although it remains to be seen how they use this in practice.
Employment Allowance is taxable, i.e. subject to Corporation Tax (companies) / Income Tax (partnerships / sole traders).