Reduced Employer National Insurance Contributions with the Employment allowance

From April 2014, businesses will be able to benefit from the employment allowance that has been introduced. The allowance was introduced as a measure to help small businesses and it is estimated that 450,000 small businesses will not need to pay employer national insurance, freeing up money for growth and taking on additional employees.

What is the employment allowance:

The employment allowance is a reduction in employer class 2 national insurance contributions (NICs) on employees’ and directors’ earnings by up to £2000 each tax year.

Who can claim it:

There are some exceptions but any business or charity that pays employer class 1 NICs can claim the allowance.

Exceptions

  • If your company or charity is part of a group, only one company or charity can claim the allowance.
  • If you run more than one PAYE scheme, you can only claim the allowance against one scheme.

Excluded employers

You cannot claim the Employment Allowance, for example if you:

  • employ someone for personal, household or domestic work, such as a nanny, au pair, chauffeur, gardener, care support worker
  • already claim the allowance through a connected company or charity
  • are a public authority, this includes; local, district, town and parish councils
  • carry out functions either wholly or mainly of a public nature (unless you have charitable status), for example:
    • NHS services
    • General Practitioner services
    • the managing of housing stock owned by or for a local council
    • providing a meals on wheels service for a local council
    • refuse collection for a local council
    • prison services
    • collecting debt for a government department
  • You do not carry out a function of a public nature, if you are:
    •  providing security and cleaning services for a public building, such as government or local council offices
    • supplying IT services for a government department or local council
  • Personal and Managed Service Companies who pay contract fees instead of a wage or salary, may not be able to claim the Employment Allowance, as you cannot claim the allowance for any deemed payments of employment income.
  • Service companies can only claim the allowance, if you pay earnings and have an employer Class 1 NICs liability on these earnings.

Click here for more detailed guidance on excluded business types.

How to claim the employment allowance

It is easy to claim using your payroll software or the HM Revenue and Customs’ (HMRC’s) Basic PAYE Tools for 2014-15. When you make your claim, you must reduce your employer Class 1 NICs payment by an amount of Employment Allowance equal to your employer Class 1 NICs due, but not more than £2,000 per year (most software will do this for you once you have confirmed that you are eligible for the allowance). Once you claim the allowance, HMRC will carry forward your claim to the next tax year so do check at the beginning of each tax year that your circumstances haven’t changed.

Example

If your employer Class 1 NICs are £300 each month, in April to September (6 months) you will be able to use the Employment Allowance but as the maximum is capped at £2,000, you will need to pay Class 1 employer NICs of £100 in October. The full amounts will be due in the remaining months of the tax year until the new tax year begins and you can start claiming the allowance again.

Month Employer Class 1 NICs due (£) Employment allowance claimed in month (£) Employer Class 1 NICs paid (£) Employment allowance remaining (£)
April 300 300 0 1,700
May 300 300 0 1,400
June 300 300 0 1,100
July 300 300 0 800
August 300 300 0 500
September 300 300 0 200
October 300 200 100 0
November 300 0 300 300
December 300 0 300 300

You will be able to see how much of the Employment Allowance you have used in ‘View PAYE Liabilities and Payments’ in HMRCs Online Service.