Sometimes even the smallest saving is worth having and the new Employment Allowance can, in certain circumstances, be used to save just that little bit more.
From April 2014, eligible employers have been able to claim the Employment Allowance and reduce their employer’s Class 1 NIC bill by up to £2,000 per annum. Designed by the Government as an incentive to employ more staff, you can claim the Employment Allowance if you are a business or charity (including Community Amateur Sports Clubs) that pays employer Class 1 NICs on your employees’ or directors’ earnings. It is not, however, available for those employing domestic staff, those carrying out functions of a public nature (for example GP services, Prison authorities, parish councils) or if you undertake related duties to a public nature (for example providing cleaning services to a public building or IT services to public schools) . On the basis that your company (or charity) activities qualify, you can claim the £2,000 allowance against one PAYE scheme only (this in order to prevent companies operating multiple PAYE schemes from claiming multiple times) and a similar restriction applies for a group of companies in that again, only one allowance is allowed. That said, the allowance is available year-on-year and will automatically be applied again by HMRC.
So how can the Employment Allowance be used creatively?
Whilst the Government’s intention with regards to the allowance is to encourage growth through new employment, in certain circumstances the allowance can be used to provide a saving of NIC, allowing a director to increase the amount he/she draws from the company before incurring any tax or NIC costs. The specific range across which this allowance will work this way is limited but is likely to affect quite a few owner-managed companies.
At the moment, the secondary earnings limit for NI (currently £7,956) is the threshold above which costs start to accrue for NIC and this is the limit often chosen for a director’s salary, before the rest is drawn NIC free as dividends. If we assume that this is the case on our sample company and that the Director has no other income and that the Employment allowance is not being used elsewhere for another member of staff, it is possible to increase the Director’s salary to £10,000 and save overall. The figures work like this:
Company saving: Corporation Tax (£10,000 – £7,956) x 20% £ 408.80
Employers NIC (using £282.07 of the £2,000 allce) nil
Personal position: Income tax (covered by Personal Allowance) nil
Employee NIC liability £(245.28)
Overall position saving £ 163.52
The above is a rather simplistic use of the Employment Allowance and will not be available in all cases, but is likely to apply to a lot for small one-man band Limited Companies. There is also no disadvantage to increasing a director’s salary part way through the tax year either as a director’s NIC position is calculated cumulatively, across the year rather than on a per week or month basis for “normal” staff. You do, however, have to bear in mind the cost of implementing any such changes.
For further information on any of the above points or to discuss your tax affairs generally, please do not hesitate to contact Robin Beadle.