Graham Carson of start-up accountancy firm Inca offers guidance to Oxfordshire businesses on how to benefit from the Government’s newly introduced Employment Allowance

 

As the Government continues to bang the drum about Britain’s small businesses making a vital contribution to the economy, a new piece of legislation has been introduced with the aim of helping small and medium-sized enterprises (SMEs) to do exactly that.

SMEs are set to become the largest group to benefit from the Employment Allowance, created to assist those who may have found their growth hampered by taxes.
The National Insurance Contributions Bill, of which the Employment Allowance is part of, was enforced in April 2014 and will deliver a £2,000 saving for employers each year which is expected to be spent on taking on new staff, increasing wages or investing in the business.
This isn’t a ‘cash-back’ scheme but instead will reduce the amount of employer’s national insurance contributions (NIC) paid to HMRC on employee’s wages. So if you usually pay less than £2,000 to HMRC for employer’s NI, your bill will be eliminated.
According to Government statistics, the Employment Allowance will result in 1.25 million businesses and charities or around a third of all employers no longer paying NIC.
However, it is important to remember that employers are still required to deduct employee’s NIC and PAYE from staff wages, with the responsibility still falling to all employers to ensure payments are made to HMRC.
As with most ‘benefits’ there are exceptions. If a business employs domestic workers, such as nannies, gardeners and au pairs, the £2,000 saving doesn’t apply.
A business is also exempt if it carries out over half of its work in the public sector, unless employing security guards, cleaners of government buildings or fulfilling a government IT contract, in which case, the £2,000 saving does apply.

Tax efficient pay rise
One added and possibly unplanned benefit of the new Employment Allowance is that many directors of small companies will be able to receive a tax efficient pay rise of around £2,000 per year.
Historically, directors who also owned their small company would have been paid up to the annual NIC threshold, which is lower than the tax-free personal allowance.
Paying themselves above the NIC level would have incurred employee national insurance at a rate of 12 per cent plus employer national insurance at a rate of 13.8 per cent, a combined 25.8 per cent, all this to make a 20 per cent corporation tax saving. Effectively, the director would have been worse off by nearly six per cent.
Now many can pay this extra annual top up to their salary as they won’t have to pay the employer national insurance element.
They will still pay the employee national insurance part of the increase, but will save corporation tax on the same increase, so becoming eight per cent better off through the pay rise.

Creating Jobs
The £2000 tax cut will undoubtedly free up money for small businesses aspiring to grow, by allowing them to hire their first employee or expand their existing workforce.
Businesses will now be able to employ four adults or 10 workers aged 18-20 full-time on the National Minimum Wage without paying any employer NI contributions at all.

What happens next year?
Once made, HMRC will automatically carry your claim forward each tax year so it’s important to check your circumstances have not changed.