Since the start of April, many employers throughout the UK have benefitted from a new employment allowance. The allowance entitles businesses with employees to an allowance of up to £2,000 against National Insurance contributions. However, many employers are not fully up-to-speed on the way it works. There are a number of small but important points that small businesses should understand.
The new employment allowance counts against employers’ national insurance contributions. The total entitlement is £2,000 through the tax year, so if you currently pay less than that it will eliminate the contributions you need to make completely.
At no point will you receive any of the allowance as cash. Instead, it reduces the size of the contributions you make. You get your entitlement by paying less to HMRC, not by money flowing in the opposite direction.
The scheme only applies to employers’ national insurance contributions, which are made against staff wages. As such, payroll services with employees are eligible. Sole traders or partnerships that do not have any employees will not have any entitlement to the allowance.
Not all employers will be eligible. There are some exceptions to eligibility, such as businesses that perform more than half of their work in the public sector. Those who employ domestic workers, including gardeners and nannies, will also be excluded. However, interestingly these rules defining exceptions also have some exceptions. Businesses on government IT contracts will still be eligible, as will cleaners and security guards working in government buildings, despite their work being within the public sector.
Receiving the Allowance
As mentioned above, you technically never receive the allowance but instead pay less money to HMRC. It only counts against the national insurance contributions that the business is required to make as an employer, and does not come out of the employee’s national insurance contributions or PAYE payments.
There is one exception to the above rule, allowing it to be subtracted from PAYE. If you only realise partway through the year that you are entitled to the allowance, you will be able to backdate your claim. If you will not be paying enough in the coming year to recover the money through reduced national insurance payments, you can offset the remainder against PAYE liabilities instead. Once again, this involves paying less to HMRC and does not mean that you will receive money from them.
It is possible that a business may lose their entitlement during a tax year. For example, it may gain a new public sector contract or lose an old private sector one, and as a result be doing more than half of its work in the public sector. If this happens you will not only cease being entitled to claim the allowance, but have to pay back what you have already claimed through the tax year to date. It is the business’ responsibility to notify HMRC if this happens.