How the Employment Allowance Can Help Your Business Grow
The Employment Allowance – referred to, inaccurately, by some as the employer’s allowance – reduces the amount of National Insurance that businesses must pay by up to £4,000 per year, a possible real boon for a small business. Is it possible for your small business to benefit from this incentive? Let’s take a look.
The Basics of Employment Allowance
The scheme was put in place to help spur economic growth and encourage UK small businesses to hire more workers. All businesses with a total NI bill of £100,000 or less in the previous tax year are eligible to participate in it.
A company can use the scheme to write off the first £4,000 of its annual Employers’ NIC bill (from April 2020).
The Allowance is ‘claimed’ each month as the liability arises through your company’s payroll process. As a result, no Employers’ NICs are due until your company’s £4,000 allowance has been exhausted.
So, is your firm eligible for this helpful break?
- Companies are eligible for the Allowance if they pay Class 1 Employers’ National Insurance Contributions. This is, however, true for all limited companies.
- Because they pay Class 2 and Class 4 Contributions, self-employed people are ineligible to claim against any profits they take personally. They can, however, make a claim if they employ people and pay Class 1 NICs.
- If your company serves the public sector, you won’t be able to claim.
- The Allowance is not available to sole proprietorships with no additional employees. The EA’s entire purpose is to encourage businesses to hire more people, so this only makes sense. As a result, if you’re a one-man-band with no employees, you won’t be able to claim the EA. This eliminates many professional contractor firms.
- If your business employs one or more people, at least one of them, in addition to the director, must be paid more than the secondary NIC threshold of £8,840 per year.
Setting Salary Levels with Employment Allowance in Mind
Importantly, you will only benefit from this Government measure if you pay yourself (and your employees) enough to incur and claim Employers’ NICs.
Furthermore, as salary levels rise, so do income tax and employee NIC liabilities, so there are several factors to consider when determining the ideal salary level.
From April 6, 2021, the personal allowance (the amount you can earn before paying any income tax) is £12,570, and if your salary is £9,568 or less during the 2021/22 tax year this is known as the ‘Primary Threshold,’ you will not pay any Employees’ NICs.
Employers’ National Insurance is paid at a rate of 13.8 percent on salaries above the ‘Secondary Threshold’ of £8,840 per year.
How the Employment Allowance works in practice – £12,570 salary
Is it worth paying an employee a £12,570 salary during the 2021/22 tax year, as opposed to £8,840, if your company is eligible for the EA? Here are some numbers to help you decide.
- The EA will offset the £514.74 Employers’ NI bill if the company pays its employee(s) a £12,570 salary.
- In our example, no income tax is due on either salary because the Personal Allowance for 2021/22 is £12,570.
- The company saves £708.70 in Corporation Tax by paying a salary of £3,730 more than the £8,840 salary level.
- However, the employee has an additional Employees’ National Insurance bill of £360.24 to pay.
- So, assuming your company is eligible to claim the EA, paying a £12,570 salary in 2022/22 will save you £348.46 compared to paying an £8,840 salary.
- From 2020/21 onwards, the EA must be claimed each year in order to receive it, and it can no longer be carried over from year to year as it could previously.
Confused? We’re not surprised. There’s more to the ‘simple’ employment allowance than people realise. Yet get it right, and it could benefit you, your employees and your firm’s chances of attracting top talent.
Needed help with your accounting? Pearl Lemon Accountants work with businesses of all sizes and in all kinds of niches. Contact us today to discuss how we can help you.