What is the UK Employment Allowance?

 In Small Business Accounting

Find out about how you could reduce your National Insurance bill by up to 3,000 by using up your employment allowance.

The UK employment allowance is a great way to reduce your class 1 Secondary National Insurance contributions by up to £3,000 per year. However, it is something that causes a certain amount of confusion especially with new changes expected to come in for 2020.

From 2020, the Government will be withdrawing the Employment Allowance from all companies whose NIC bill was more than £100,000 in the previous year. It’s a move intended to realign the allowance with its original intention – to help businesses grow and hire new staff, but it has got a number of small and medium-sized businesses asking whether or not they will still get this from next year.

Who qualifies for the Employment Support Allowance?

The short answer, in most cases, is yes. As things stand, the Employment Allowance applies to all businesses and charities – barring a few exceptions – regardless of their size. It’s a flat rate – which allows you to reclaim a proportion of NIC contributions for employees until you either reach the limit of £3,000 or the tax year ends – whichever comes sooner.

Because it’s a flat-rate, it somewhat limits the value to larger organisations. Everyone gets the same, so if you are a large corporation with an enormous NIC bill, that £3,000 rebate isn’t going to mean much, but to a smaller organisation it could be a massive incentive. From the government’s point of view, therefore, extending this cut to bigger corporations is a waste of money and with official coffers looking rather threadbare, you can understand that they want to retain as much as they possibly can.

This means that the vast majority of SMEs and micro-businesses will still be eligible, but reports suggest that the smaller a business becomes, the lower its awareness levels are. Government research found that almost seven in ten small business owners had taken up their Employment Allowance, but among micro businesses (those with fewer than five employees), that figure had reduced to 59%.

With those who had not claimed, a perceived lack of eligibility was cited as the main reason which means those who need this rebate the most are also among the least likely to claim it.

Understanding your eligibility

This figure might not be surprising. Tax rules can be complicated and if you’re a start-up or micro business, it’s easy to be uncertain about whether or not you qualify which is why employing expert accountants can be so useful. While this might represent an additional expense, it can also unlock savings by ensuring you claim all the tax breaks to which you should be entitled.

If you haven’t made a claim yet, or you’re worried that you will no longer qualify after 2020, you should relax. As long as your NIC bill isn’t higher than the threshold you will, in all probability, still be able to claim it.

The only circumstances in which you will not be eligible for employment allowances will be as follows:

  • You’re a public body: All public bodies doing more than half of their work in the public sector – except for charities.
  • Business takeovers: If you have taken over a business and retain the employees, you are not allowed to claim the unclaimed employment allowance for those two employees. For example, imagine a contractor employs two people for whom he claims employment allowance on Class 1 NIC contributions. He decided to sell up to another firm which is looking to diversify and they decide to retain the two employees. They will not be able to benefit from their unclaimed employment allowance for that tax year.
  • Business splits: Likewise, if your business splits during a tax year and reforms as a new business there is no entitlement to unclaimed NIC for retained employees.
  • A service company: If it works under IR35 and your only revenue comes from the earnings of the intermediary.
  • Employing gardeners and cleaners: You employ someone for domestic or gardening work unless they are a carer or support worker.

If you’re self-employed you may be able to claim this allowance, but only if you have incorporated as a limited company and are paying class 1 NIC on those employees’ earnings. However, you cannot claim if you are the director and the only employee who is paid above the secondary allowance.

At 3 Wise Bears we can help with your year-end accounts, payroll management and other accounting services. By having this expertise at your disposal, you can ensure you will not be missing out on tax breaks which could be valuable for your business. Equally, it ensures you don’t have to spend time worrying if the new rules are going to affect your eligibility – we can manage this and any other rule changes for you.

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