Most businesses have been entitled to an Employment Allowance (“EA”) of up to £3,000 per annum which reduces a business’s liability to employer’s National Insurance (“NI”). From 6 April 2020 the EA will increase to £4,000 per annum.
There are some instances where the EA is not available to a business. Below are some examples.
Single director companies
From 6 April 2016, a company does not qualify for the EA where all the payments of earnings it makes in a tax year are paid to or for the benefit of one employed earner only, who is, at the time the payments are made, also a director of the company.
There may be a planning opportunity however as it may be possible to include your spouse on the company’s payroll to ensure the company has one other employed earner. Where this is done the EA would be available, assuming your spouse is paid at least £8,788 per annum and carries out some form of work for the business.
If at the beginning of the tax year two or more employers are connected with one another, only one company may claim the EA. It is up to the employers to decide which company will claim the allowance.
Class 1 Liability over £100,000
With effect from 6 April 2020, employers with an employer’s NI liability of £100K or more in the preceding tax year will not be eligible to claim the EA. When considering the £100K limit the total liability of all connected employers must be added together.
Transitional rules give a period of grace meaning that where employers become connected during the tax year causing the total NI liability to exceed £100K, they will be eligible to continue claiming for the remainder of the tax year but will cease to be eligible from the start of the following tax year.
If however an employer becomes connected to a group of connected employers whose collective liability was in excess of £100K in the preceding year, the employer joining the group will no longer be eligible for the EA in the year in which they join.
From 6 April 2020, the EA will be operated as de minimis state aid. This means that employers already in receipt of state aid will need to check that they have sufficient headroom to include the EA within their relevant de minimis limit, which is calculated in euros over a three year period (the current tax year plus the previous two tax years) and will be dependent upon the particular economic trade sector within which the employer operates.
The possible availability of the EA can however complicate matters when working out the most efficient monthly salary. Therefore, the optimum salary from an overall tax and NI perspective will depend on how many people are on a company’s payroll and how much they each earn.
If you think your company could be affected by the changes coming in to force from 6 April 2020 or you would like more information on the EA and how this could impact the monthly salary you should draw in 2020/21, please contact the manager who normally deals with your company’s affairs.