Class 1 national insurance is a burden that UK employers who pay their employees above the secondary threshold for national insurance (£169 per week 20/21) have the bare. To help ease this burden and encourage employment in small businesses, some “smaller” employers can take advantage of a national insurance employment allowance available from HMRC. In this article we will look at how small employers may be able to utilise this allowance to reduce their national insurance liability by up to £4,000.
What Is The National Insurance Employment Allowance?
For the 2020-21 tax year most employers who pay an employee more than £169 per week will start to incur an employers class 1 national insurance liability at a rate of 13.8%. This threshold can vary depending on the employees national insurance category however the £169 threshold is what currently applies to the vast majority of UK employees.
To help some smaller employers HMRC introduced the employment allowance which is currently £4,000 for the 20/21 tax year. This allowance will result in the first £4,000 of class 1 national insurance liability that the employer incurs being reduced to zero.
As this is an allowance it does not matter if the employer incurs less than £4,000 liability in the tax year. They will still be able to reduce the liability they have to zero. For example if a qualifying employer incurs £2,000 employers class 1 national insurance liability in the 20/21 tax year then they will still be able to reduce the liability to zero. Unfortunately the remaining allowance of £2,000 may then be lost as it cannot be carried forward to future tax years. It is however possible to backdate a claim for the employment allowance up to 4 tax years as far back as the 16/17 tax year which can result in a repayment where national insurance liabilities have already been paid.
It is worth noting that from 2016 to 2020 the employment allowance was only £3,000 per year so any backdated claim would be processed using this lower allowance.
Who Can Claim The Employment Allowance?
Although the employment allowance is designed to give relief to small businesses unfortunately HMRC do not allow all small employers to claim this useful allowance. The employment allowance is only available to businesses, charities and community amateur sports clubs who’s class 1 employers national insurance liabilities were less than £100,000 in the previous tax year. There is also special guidance for those who employ care or support workers. A business must consider whether it is part of a group and if it has more than one payroll when calculating it’s prior year liabilities as it is the liability of the overall group that is considered. The employment allowance is per business not per payroll and can only be claimed by one business in a qualifying group.
Public bodies and businesses who do more than half of their work in the public sector are not allowed to claim the employment allowance although there are special rules for charities in this situation. As always there are a few exemptions to these public sector rules so if your business did fall into this category it is worth reading the HMRC detailed guidance.
Unfortunately there are also restrictions that target personal service companies as you cannot claim if both the following apply:
– You’re a company with only 1 employee paid above the class 1 national insurance secondary threshold (currently £169 per week)
– The employee is also a director of the company
This means that most contractors and freelancers are unable to utilise this allowance.
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Once you’ve determined that you are a qualifying employer, claiming the national insurance employment allowance is very straightforward. Most payroll software packages have a tick box option to start utilising the allowance. You will just need to select which industry your business or charity belongs to and then the allowance will be applied moving forward.
When To Claim The Employment Allowance
If your company qualifies for the national insurance employment allowance then it’s best to claim as soon as possible to start enjoying the tax savings. Remember it’s the first £4,000 of class 1 national insurance that will be offset so the earlier in the tax year you start, the more chance you have of utilising the full allowance. If a company made a claim part way through the tax year and hasn’t utilised the full allowance after incurring class 1 liabilities earlier in the year then it can request to HMRC that remaining allowance is offset against other tax bills (corporation tax, VAT etc). This is at a separate request to HMRC and will require more administrative work so it’s better to apply as early as possible and utilise the allowance in the tax year where possible.
De Minimus State Aid
You may recognise the term “state aid” as one of the sticking points of brexit negotiations.. It is worth noting that the national insurance employment allowance is considered de minimus state aid and under the current transition period a company can only receive a certain amount of this aid. This EU regulation is designed to help maintain a competitive market for the entire EU. As an employer you will need to consider any other state aid received in the past 3 years to ensure you do not exceed the limit allocated to your industry. HMRC provide a comprehensive explanation of how de minimus state aid and the employment allowance currently interact. How this will work in future tax years will depend on the outcome of brexit negotiations.
Can The Self Employed Claim?
The profits made from self employment are not subject to class 1 national insurance. Instead you pay class 2 and class 4 NI which means that unfortunately the self employed are unable to use the national insurance employment allowance to reduce their personal NI liability.
If a self employed individual employs other individuals via a PAYE payroll scheme then they may be able to claim the employment allowance subject to the rest of the qualifying conditions being met.
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Adam Hill
Practice based accountant with over 10 years experience, specialising in SME's, Freelancers and Personal Tax. "I take pride in proactively recognising tax planning opportunities on behalf of clients to help them operate more efficiently."
