£2,000 NIC cut for employers

Smaller employers should especially welcome the new Employment Allowance that was introduced from 6 April. It has the effect of reducing the amount of employer class 1 national insurance contributions (NICs) each employer pays to HM Revenue & Customs (HMRC) by up to £2,000 each tax year.

You can claim the Employment Allowance if you are a business or charity (including Community Amateur Sports Clubs) that pays employer Class 1 NICs on your employees’ or directors’ earnings.

If your company belongs to a group or your charity is part of a charities structure, only one company or charity can claim the allowance. It is up to you to decide which of them will do so. You cannot claim the Employment Allowance if you employ someone for personal, household or domestic work, such as a nanny, gardener or au pair. Public organisations like local authorities also cannot claim the allowance.

You can only claim the £2,000 Employment Allowance against one PAYE scheme - even if your organisation runs multiple schemes.

The employment allowance, as the name suggests, was introduced with the aim of encouraging employment. For 2014/15 it should cover your NICs if you employ four adult full-time workers (or eleven 18-20 year-olds) at the national minimum wage.

If you are the owner-manager of your company and withdraw the profits mainly in the form of dividends, the allowance may be of little or no benefit unless you have employees or you decide to pay yourself a salary or bonus of more than the personal allowance of £10,000.

But remember that although you can reduce your NICs by £2,000, you will lose the tax relief you would have received on those NICs.

Claiming the allowance is quite straightforward, and if you run your own payroll it should be as simple as confirming you qualify when first running the payroll for 2014/15. If the software does not support a claim, you can use HMRC’s Basic PAYE Tools. The allowance is deducted as your NICs arise; so if the monthly employer’s NICs are £500, there should be nothing to pay until August.

In this edition

This newsletter is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The newsletter represents our understanding of law and HM Revenue & Customs practice as at 6 May 2014.