Employment Allowance

Posted 25/07/2019

If an individual, limited company or a charity pays Class 1 National Insurance for its employees, it may be entitled to the employment allowance. This entitles the employer up to £3,000 off its National Insurance bill within each tax year. The allowance is not available to a limited company which has only their director on their payroll, or has several employees but only the director earns a salary of over £156 which is the Secondary Threshold for Class 1 National Insurance. The deciding factor for the allowance is whether there are additional employees earning over the secondary threshold through the company payroll. In the event of two employer PAYE references, only one can have the employment allowance claimed against its PAYE taxes.

Ensuring that the allowance is claimed for correctly is important; HMRC can impose penalties if PAYE tax is paid late due to a miscalculation. If there is any doubt of a company’s status with regards to claiming the employment allowance it is ideal to seek advice either from HMRC or an accountant.If a company has additional employees earning above the secondary threshold part way through the year before a change which means only the director is the one earning over the secondary threshold, the allowance can still be claimed for the whole of the tax year and then stopped when the new tax year begins. This can exclude businesses who take on seasonal employees where one or more employee is earning above the secondary threshold.
Additionally, a limited company may have more than one director who earn a salary through the business. If both directors receive a salary above the secondary threshold the employment allowance is still claimable as there is an additional employee.

If the company carries out more than 50% of their work and services within the public sector then they will lose their eligibility for the employment allowance, such as carrying out NHS work, carrying out a prison service or refuse collection for a local council, running a debt collection for the government. Supplying services for a public building, such an IT support or cleaning services, do not count as work carried out within the public sector.
For an employer who employees people to work in a personal role to support the running of a home, such as a cleaner or a nanny, the employer allowance would be disallowed as the services are not for business purpose. The exception to this would be the employment of a care or support worker for a person who needs the extra support, such as due to old age or a disability.The employment allowance is claimed using the payroll software used to send Real Time Information (RTIs) to HMRC. There is a box called ‘Employment Allowance indicator’ or similar and this box should be set to ‘yes’ for the claim to be included within the calculations. If the employer is not entitled to the allowance the ‘Employment Allowance indicator’ box should be set to ‘no’.

Tags: Payroll, PAYE, PAYE tax, taxes


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