For the past two tax years (2014/15 and 2015/16) most employers have been able to reduce their employer’s national insurance bill by a maximum of £2,000 a year. We have applied this to all clients where we prepare the payroll.
For the current tax year (2016/17) the employment allowance increases to a maximum of £3,000 a year.
This is not necessarily good news for everyone as there is now a restriction which prevents this being claimed by single person companies. For employment allowance purposes, a single person company is a company in which the only person employed is the sole director of the company. If the sole director is paid more than the secondary threshold (i.e. £8,112 per year or more) and the company incurs employer’s national insurance, then the company cannot offset employment allowance against this as it had been able to do in previous tax years.
However, if such a company has an employee or a second director, and the employee or second director is also paid above the secondary threshold so that the company incurs further employer’s national insurance, then the £3,000 employment allowance would be available for offsetting against the total employer’s national insurance charge, including that on the first director.
As the law currently stands there is nothing to prevent a “connected person”, e.g. a wife, child or other close relative, being the second director or the employee.
For many single person companies capable of paying dividends this will not be a problem. The calculations for the tax effective “low salary – high dividends” option may still favour lower salaries that do not attract national insurance. In such cases restrictions on claiming the employment allowance will be irrelevant anyway.
A word of caution – it is important to note that if an employer takes any action for which the sole purpose is to obtain the employment allowance, then the employment allowance is denied. For example, if a single person company took on an employee or a second director just to claim the employment allowance, HMRC could later deny the allowance and also impose penalties. With regard to employment allowance there must always be a good commercial reason for taking on a person as an employee or a second director.
If you have any questions about employment allowance or any other payroll matter, please contact us on 01869 222830 or complete the form below.