“Can you tell me more about the £2,000 employment allowance and how I get this money? I own and control 3 limited companies, does this mean I can have 3 sets of the employment allowance i.e. £6,000?”

shutterstock_252083176

UPDATE MAY 2016 – please see our updated article on the Employment Allowance 2016/17

Employers (secondary) class 1 national insurance is currently charged to businesses at a rate of 13.8% on pay to employees that is over £676 per month (£8,112 per tax year).

At the start of the 2014-15 tax year the employment allowance was introduced. This legislation allows an employer an allowance of up to £2,000 against their employers’ class 1 national insurance liability that would otherwise be due to HMRC in that tax year. This tax-break has continued into the 2015-16 financial year.

(Update March 2016 : for 16/17 the employment allowance is increasing to £3,000 per year but there are various restrictions and rules, including being blocked for sole director payrolls)

This is normally claimed via payroll software or by your accountant where they prepare your payroll on your company’s behalf.

For example – a company has 4 employees which over the course of the tax year produces an employer’s national insurance liability of £3,000 – in this instance the employment allowance would reduce the amount payable to HMRC by the full £2,000, hence only £1,000 would be payable. If, however, the total liability in the tax year was £1,500 the amount of employers allowance would be restricted to this liability and the total payable would be nil. The allowance does not carry forwards to future years.

In your case, at the start of the tax year, 2 or more companies are connected with each other as you own and control 3 companies. Only one of those companies can qualify for the employment allowance for the tax year. It is up to you to decide which one of these you wish qualify for the employment allowance. For tax planning purposes it will normally be sensible to select the company which you expect to have the highest liability in the tax year. Once selected this cannot be changed for the rest of the tax year.

You may not be eligible for the employment allowance if you employ someone for personal or household work; you work in parts of the public sector or fall foul of IR35 rules.