What is the Employment Allowance?

The Employment Allowance can be offset against the employer Class 1 NIC liability. The amount of the Employment Allowance was £2,000 for 2014/15 and 2015/16 and has increased to £3,000 for 2016/17. This allowance is available to many employers.

There are some exceptions for employer Class 1 liabilities including liabilities arising from:

• a person who is employed (wholly or partly) for purposes connected with the employer’s personal, family or household affairs
• the carrying out of functions either wholly or mainly of a public nature (unless charitable status applies), e.g. NHS services and General Practitioner services
• employer contributions deemed to arise under IR35 for personal service companies.

The employment allowance is limited to a total of £2,000 (£3,000 for 2016/17), where there are ‘connected’ employers. If one company controls the other company, then the two companies are connected with each other.

The allowance is claimed as part of the payroll process. The employer’s NIC liability is not payable until the Employment Allowance limit of £3,000 for 2016/17 has been reached.

Employment Allowance recent changes

From April 2016, companies where the director is the sole employee will no longer be able to claim the Employment Allowance.

Contributions payment deadline

The Class 1 NI contributions are payable at the same time as PAYE. Class 1A contributions are by 19 July (22nd for cleared electronic payment) after the tax year in which the benefits were provided.

So, it is important to distinguish between earnings and benefits.

Earnings

The Class 1 earnings will not always be the same as those for income tax. Earnings for NI purposes include:

• salaries and wages
• bonuses, commissions and fees
• holiday pay
• certain termination payments

There can be issues in relation to the treatment of:

• expense payments
• benefits

If expense payments are specific payments in relation to identifiable business expenses, they will generally be outside the scope of NI. However, round sum allowances give rise to a NI liability.

In general benefits are not liable to Class 1 NICs. However, there are some important exceptions including:

• most vouchers
• stocks and shares
• other assets which can be readily converted into cash
• the payment of an employee’s liability by an employer

Directors

As directors are employees, they must pay Class 1 NICs. However, directorships can create various NICs problems. For example:

• directors may have more than one directorship
• directors’ fees and bonuses are subject to NICs when they are voted or paid, whichever is the earlier
• overdrawn directors’ loan accounts can give rise to a NICs liability

We can advise you in any specific circumstances.

If you are an Employer in Bromley, Kent and London areas, and want to claim the Employment allowance, please contact us at Adiva Accountants London for further advice.