As you may be aware, employers must pay Class 1 National Insurance contributions to HMRC on the relevant wages amounts of their staff. This can be reduced by £3,000 per year by an incentive called the employment allowance. I think it will help you better understand by way of the following simplified example on how does this allowance work in practice.
Let’s say during the tax year from 6 April 2019 to 5 April 2020 an eligible employer has only one staff member in the payroll with an annual gross salary of £32,000. The employer’s NIC in this case would be £3,224.78 for the year. If the employer is eligible and claimed the employment allowance, the total employer NIC will be reduced by £3,000 to only £224.78. This reduction is automatically applied when we run the payroll of the employer.
There are some restrictions on the availability of the employment allowance. I set out below two key restrictions as most relevant to smaller businesses:
- A business with a single director in payroll can’t claim this allowance. That means if another employee is added to the payroll, then the allowance will become available in that particular tax year.
- If two business are connected, then only one of them can claim the allowance. A question then arises when will the businesses be considered as connected. Well, businesses will be connected if:
a) One business controls the another or both are under the control of a same person (s).
b) There is a commercial inter dependence between the businesses. This simply means one provides some form of support to another either financial or other resources OR they share same premises, management, employees, customers. This will also apply if two different companies are owned by husband and wife. Therefore, any such arrangement to claim the employment allowance between the connected businesses restricts the claim to one of the business only.
Please click HERE if you need any further help to understand and apply the rules correctly.