There has been quite a bit of talk regarding the UK Employment Allowance recently. People have been wondering about the new rules and what they entail in the coming year. This article sheds light on this allowance and everything it means for the 2020-2021 tax year.
So, what is the Employment Allowance? Introduced in April-14, the Employment Allowance essentially enables some businesses operating in the United Kingdom who have employed staff to minimise their annual bill of Employers National Insurance (NI) up to £3,000. As a result, the government of the UK is currently introducing new rules for the tax year 2020-2021 regarding the types of businesses in the country that will be eligible to claim this tax reduction.
Employment allowance eligibility being introduced starting 6th April 2020
Starting 6th April 2020, as per the Employment Allowance, smaller businesses can claim a reduction in their taxes. This allowance does not apply to large businesses. As per the new norms, businesses having an Employer’s (Secondary) National Insurance bill of £100,000 or over in the previous taxation year are not eligible to claim this allowance. Simply put, it only applies to small businesses, and the Employment Allowance has been increased to £4,000, from £3,000.
You can check the complete eligibility criteria for this allowance on the official website of gov.uk.
Employment allowance eligibility until 5th April 2020
As per the norms, until 5th April 2020, UK businesses can claim a total reduction of their secondary NI taxes up to £3,000, applicable for the taxation year 2019-2020. This applies to the amount of Class 1 Secondary NICs or National Insurance Contributions that they pay. Moreover, the majority of the contractors and freelancers are already ineligible to claim the allowance as it does not apply to PSC’s with a single director or employee. The contractors are also not able to claim this allowance if their work is deemed inside IR35. The allowance cannot be claimed by companies that employ a person for domestic work such as a gardener or a nanny.
The public sector rules have a few exceptions. This holds particularly true if you offer IT services for a local council or a government, in which case you will be eligible for the Employment Allowance. In the same vein, if you offer cleaning or security services to a public building like council offices or government, you will again be eligible for the Employment Allowance. You can find further guidance and instructions on the all-new eligibility criteria of the Employment Allowance on the official website of gov.uk.
A look at the rules
The Employment Allowance is basically an allowance, quite unlike staff Christmas parties and other HMRC giveaways, which are only one-time exceptions. As a part of the Employment Allowance, eligible businesses can use up to the limit of £4,000 every tax year. In addition to that, employer NICs are usually charged at the rate of 13.8%, whereas a full-time employee who has a salary of £22,000 will have to incur employer NICs of £1,823.26 yearly or £151.94 monthly. The complete details on the different rates of employer NIC are present on the website of gov.uk.
For a company that has an employee who is paid £22,000 and claims the Employment Allowance shall not have to pay an Employer NICs in a specific taxation year. This is because the full amount of £1,823.26 lies within the allowance of £4,000. By comparison, it can be said that an employee who is paid £43,000 yearly will generate a total of £4,721.26 yearly in employer NICs. When he/she uses the Employment Allowance, the initial amount of £4,000 can essentially be written off, which leaves £721.26 payable for a specific taxation year.
It is pertinent to note here that employer NICs that are over £4,000 shall be paid when the Employment Allowance is exhausted. This means that taking the above example; you will not have to pay Employer NICs for the tax year’s first ten months. In the eleventh month, the NIC will be £327.84, and in the twelfth month, it will be £393.42, bringing the total to £721.26. Also, the Employment Allowance is an allowance of £4,000 per business and not per employee.
How can you claim the employment allowance?
When it comes to eligible businesses, this allowance is subtracted automatically from the employer NICs using their payroll software. If you are looking for more details regarding the Employment Allowance, get in touch with CloudCo Accountancy Group