As an incentive for small businesses to employ extra staff, the government introduced an Employment Allowance on 6th April 2014.
This enables eligible employers to reduce their employer class 1 NIC’s by up to £2,000 each tax year. The claim can be made either by third party software or via HMRC Basic PAYE tools, depending on how you complete your payroll.
Once the claim has been made you will then not be required to pay the first £2,000 of your Employer NIC Liability for the year. HMRC will then automatically carry the claim forward to the next year.
An eligible employer will also be able to make a claim up to four years after the end of the tax year in which the Employment Allowance applies if they did not make a claim in the year.
Sadly, not all employers will be able to claim the employment allowance. You are not able to claim if your business falls into the following categories:
- Domestic employer – e.g. if you employ someone for personal household or domestic work such as a nanny, au pair, chauffeur or care support worker.
- You already claim the allowance through a connected company or registered charity.
- Public authorities, including local, town, district and parish councils.
- Businesses whose activities are wholly or mainly of a public nature, unless a registered charity. Examples of such businesses are providing prison services, refuse collection for a local council, general practitioners, meals on wheels service for a local council or debt collection for a government department. HMRC have however stated that you do NOT carry out a function of a public nature if you are supplying IT services for a government department or local council or providing security and cleaning services for a public building.
- Personal and managed service Companies who pay contract fees instead of a wage or salary may not be able to claim the Employment Allowance, as you cannot claim the allowance for any deemed payments of employment income. Service companies can only claim the allowance if they pay earnings and have employers Class 1 NIC liabilities on those earnings..
- Restrictions apply to business mergers, demerger transfers and purchases.
Businesses are not allowed to move the Employment Allowance to another PAYE scheme during the tax year but it can be transferred to another scheme at the start of a new tax year.
If a business does have more than one PAYE scheme and does not use the full Employment Allowance against their registered scheme and there is an employer NIC liability on another in the same tax year then they can apply to HMRC for a refund of the balance of the Employment Allowance at the end of the tax year. Both schemes must however have paid their PAYE and NIC liabilities to date.