***Update: On 6th April 2016, the Employment Allowance rules changed. The reduction in Employer’s National Insurance contributions is now £3,000 and company directors who are the sole employee of their company are no longer eligible. To find out more, take a look at the guidance from HMRC.***
It’s not a cash-back scheme, it’s a reduction of Employer’s National Insurance.
The Employment Allowance is a reduction of the amount of Employer’s National Insurance (NI) you pay to HMRC on your staff’s wages, up to £2,000 in a tax year. It is not, unfortunately, a cash-back scheme, so even if you qualify for the allowance, you will never see £2,000 landing in your business bank account - that would be far too easy! Instead, to claim the allowance, you would reduce your Employer’s NI payment every month until you reach the £2,000 allowance for that tax year.
The allowance only applies to employers
Because the Employment Allowance only reduces your Employer’s NI, you must employ staff and pay staff wages in order to claim it. If you’re a Sole Trader or in partnership and you don’t employ any staff, unfortunately you don’t qualify - you and/or your partners aren’t considered employees by HMRC, and any money you take out of the business isn’t considered employee’s wages, and isn’t subject to Employer’s NI.
If you’re the director of a limited company and your company pays you wages, your company does qualify for the allowance (apart from the exceptions below), even if you are the company’s only employee.
Not all employers are entitled to the Employment Allowance
HMRC have listed a number of businesses who, even if they employ and pay staff, won’t be able to claim the Employment Allowance.
Employers of domestic workers - such as nannies, gardeners and au pairs - are excluded, as are businesses that work more than 50% in the public sector. However, security guards and cleaners working in government buildings, and businesses working on IT contracts for government, are not covered by this exclusion. (Yes, that does mean there’s an exception to the exception, which is why it’s always important to read the small print!)
If you no longer qualify, you have to pay the money back for that year
If you become ineligible for the Employment Allowance part way through the tax year, for example you start to carry out more than 50% of your work in the public sector, then not only do you have to notify HMRC that you’re no longer eligible to claim the allowance, but you have to pay back what you’ve claimed in the tax year.
For example, if you run a stationery company and in August 2014 you land a big contract to provide stationery supplies for your local NHS hospital that represents more than 50% of your business’s work, then you would become ineligible for the allowance. You would no longer be able to claim the allowance on any future Employer’s NI contributions, but you would also have to repay anything you’ve claimed in April - July.
You can claim the allowance from 6th April - and it’s easy to do in FreeAgent
If you do qualify for the allowance, you can claim it from 6th April 2014 as part of your RTI submission - you would just reduce the amount of Employer’s National Insurance that you pay. If you’re using FreeAgent’s built-in payroll, you can confirm that you want to claim the allowance, and FreeAgent will automatically work out the reduction for you and adjust your payments and RTI filing. Easy!
There’s more information in our video and guide
Finally, if you have any detailed questions about the Employment Allowance, you might find our recent webinar useful - I answer a number of questions about the allowance, and go into some detail about the exceptions. You can also download our Employment Allowance guide for a more details.
Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.