Employment Allowance 2016/17

The HMRC Employment Allowance was introduced in 2014 as an incentive to encourage employment and it works by allowing an employer to have a certain amount of it’s employers ni (national insurance) to be free.

Employers ni for most people is calculated at 13.8% of any earnings above £8,112 for the 2016/17 tax year (there are various exemptions with employers ni, including for apprentices under 25).

The Employment Allowance was initially set at £2,000 but for the 2016/17 tax year this has increased to £3,000.

This means that if you are eligible for the allowance, the first £3,000 of employers ni is free.

Your payroll software will calculate the Employment Allowance and will use it to reduce any payments you need to make to HMRC for PAYE and national insurance.

The Employment Allowance is used up as quickly as possible during the tax year and once fully used, only then will you start paying employers ni to HMRC.

 

Employment Allowance 2016-17

 

However, there are some restrictions with the Employment Allowance to be aware of:

Single Director Payroll

If the only person on a payroll is a director of the company then the Employment Allowance cannot be claimed in 16/17 –  this is a new rule that came in on 6th April 2016 to ensure the Employment Allowance is being used to achieve it’s original aim of supporting growth in employment.

Some people are advising that this restriction can be worked around by adding a spouse (husband or wife) to the payroll to meet the criteria to then be able to claim the Employment Allowance.

However we would not advise this approach – generally with tax planning, if you try and employ a work-around to navigate a restriction, you are opening yourself to a potential challenge from HMRC.

Our general advice is that if you are a limited company freelancer or contractor then unless your spouse genuinely works in the business it would be safer to not claim the employment allowance and take a lower salary. See our guide on tax efficient salary levels for 2016/17.

If, however, you are a husband and wife company (for example) and you are both actually working in the business, then you should be able to claim the nic Employment Allowance.

You can find additional information from HMRC about single director employers.

Public Sector

If you are either a public body, or your business does more than half of it’s work for the public sector, you are not allowed to claim the Employment Allowance – unless you are a Charity.

IR35

If you’re a personal service company and you are caught by IR35 then you cannot claim the HMRC Employment Allowance.

Personal & Domestic Work

If you employ people to provide domestic or personal services (for example a gardener) you are not allowed to claim the employers ni allowance – unless you employ ‘Care and Support Workers’.  You can read HMRC’s guidance on this here.

Group of Companies / Control Multiple Businesses

If you have a business that is part of a group of companies, you can only claim the Employment Allowance for one of the PAYE schemes.

You should calculate which business would be the most cost effective to use the Employment Allowance for.

The same issue applies if you control more than one business.

For further details about the Employment Allowance 2016/17 please see HMRC here.