The start of the new tax year sees the launch of the Employment Allowance, which will enable 1.25m businesses and charities to cut up to £2,000 from their employer Class 1 National Insurance Contributions (NICs).
According to statistics produced by the Treasury, 450,000 businesses will be taken out of paying employer NICs altogether in 2014/15 and 35,000 charities will benefit by around £45m in total. A business employing 10 adults on the national minimum wage will receive a tax cut of over 40%, down to £2,870 from £4,870.
Who can claim ?
The Employment Allowance can be claimed if:
- You are a business or charity (including Community Amateur Sports Clubs) that pays employer Class 1 NICs on your employees’ or directors’ earnings, but….
- If your company belongs to a group of companies or your charity is part of a charities structure, only one company or charity can claim the allowance. The allowance can only be claimed against one PAYE scheme.
However, there are exemptions and some employers are excluded.
Who is excluded?
The Employment Allowance cannot be claimed if:
- You employ someone for personal, household or domestic work, such as a nanny, au pair, chauffeur, gardener or care support worker.
- You claim the allowance through a connected company or charity.
- You are a public authority, including local, district, town and parish councils.
- You carry out functions either wholly or mainly of a public nature such as NHS services, General Practitioner services, the managing of housing stock owned by or for a local council, provide meals on wheels or refuse collection for a local council, prison services or collect debt for a government department.
Personal and Managed Service Companies who pay contract fees instead of a wage or salary may not be able to claim the allowance, as it is not allowable for any deemed payments of employment income.
More information on eligibility for the Employment Allowance, including what happens if businesses demerge or are taken over can be viewed here http://abytx.co/1jLImdm
How to claim
The Employment Allowance is only allowable against Class 1 NICs, not Class 1A or Class 1B NICs.
Employers can use their own payroll software or use HM Revenue and Customs’ (HMRC) Basic PAYE Tools to claim the allowance.
When a claim is made, employers must reduce their employer Class 1 NICs payment by an amount of Employment Allowance equal to the employer Class 1 NICs due, but not by more than £2,000 per year.
- If an employer pays her employees monthly and her total Class 1 NICs liability is £200 (per month), the full allowance will be used by month 10 in the tax year (£200 x10=£2,000). She will then have to pay her employers Class 1 NICs liability for months 11 and 12 as normal.
- If an employer pays his employees monthly and his total Class 1 NICs liability is £3,000 (per month), the full allowance will be used in month 1 and the balance of £1,000 will have to be paid to HMRC. The employer will then have to pay his employers Class 1 NICs as normal for the rest of the year.
Claim time limits
An employer does not have to claim the Employment Allowance at the start of the tax year.
An employer may have a business based on seasonal fluctuations and may decide to use the allowance during the quieter trading months of the year to help with cash flow. So, an employer may decide not to claim the allowance between April and August, but claim from September onwards.
If an employer fails to use the Employment Allowance by the end of the tax year, HMRC will use the balance against any PAYE debt or liabilities in the following tax year. If the employer does not have any existing PAYE debt or liabilities, the balance can be claimed as a repayment.
A claim does not have to be made in the tax year itself.
An employer can claim up to 4 years after the end of the tax year in which the allowance applies. In practice, an employer wishing to claim the Employment Allowance for 2014/15, ending on 5 April 2015, must claim by 5 April 2019. HMRC will set any such Employment Allowance award off against any future or existing liabilities, unless a repayment is requested.
Further detailed guidance on claiming the Employment Allowance can be viewed here http://abytx.co/1jLLJ4e
An employer must keep any records relating to the claim for a minimum of 3 years after the end of the tax year in which the Employment Allowance was claimed.
The records must show:
- Why the employer was entitled to claim the allowance.
- How much of the allowance was used or in some circumstances repaid.
- What liabilities the allowance covered.
Employment Allowance calculator
A calculator tool is available for employers to check the effect of the Employment Allowance and it can be accessed here http://abytx.co/1i8EPlh
Author: Guy Smith, Senior Tax Consultant on the ReSource Tax and VAT Consultancy Team.