Employment Allowance – £2,000 deduction from Employers Class 1 NIC’s

As you may now be aware, the Government has announced that from 6 April 2014 there will be an allowance for businesses who operate PAYE schemes that will reduce their employers Class 1 National Insurance Contributions liability by £2,000.

The allowance will be used against the first £2,000 of employers National Insurance that would otherwise be due to be paid to HMRC.

For a business which has a number of PAYE schemes, the allowance can only be used against one of these schemes.

As is usually the case with these sorts of allowances, there are various rules in place; and in this instance the main rules that we think that you need to know about are the rules that are in place relating to the claiming of the allowance where there are connected businesses. Many of these rules are based upon the connected persons rules which are used for corporation tax purposes.

Below is an explanation of some of the various rules and scenarios regarding the claiming of the £2,000 allowance:

Simple rules/scenarios

Where a company is part of a group of companies, only one company can claim the allowance. It is a personal choice which company should have the allowance, although we would suggest that you claim the allowance in the company which has the highest National Insurance liability.

If two or more companies are under the control of the same person(s), then they are only entitled to one allowance between the companies; and once again you have to specify which of the companies will claim the allowance (you can’t share it out between the companies, nor can unused allowances be transferred to other companies). Once again we would suggest that you claim the allowance in the company which has the highest National Insurance liability.

More complex rules/scenarios

The outcomes in these situations depend on the result of a test to determine what HMRC call ‘substantial commercial interdependence’. The connected persons/connected businesses rules only apply where the companies in question are deemed to be substantially commercially interdependent.

In simple terms, companies are connected where there is a reliance/link between the companies.

For companies to be substantially commercially interdependent (and therefore only entitled to one employment allowance between these companies), there needs to be a link between the companies which is either financial, economic, or organisational (you only need one of these links to be treated as being connected):

  • Financial interdependence – this is where one company gives financial support to another, or companies have a financial interest in the affairs of the same business.
  • Economic interdependence – this is achieved where the companies either seek to realise the same economic benefit, have activities which benefits one of the other companies, or where the companies have common customers.
  • Organisational interdependence – this occurs where the companies have common management/premises/equipment/employees.

Remember, if one of the above links is present then only one employment allowance can be claimed in one of the companies; the rest of the companies will not have an allowance for the year.

Differences for unincorporated businesses

The rules for unincorporated businesses (sole trades and partnerships) are the same as for companies, with one noteworthy exception.

If an unincorporated business which claims the employment allowance does not have a liability of £2,000 for employers National Insurance in the year, any remaining allowance not used can be transferred and used against the PAYE scheme of another unincorporated business controlled by the same person(s). This transfer of the remaining allowance will take place after the end of the tax year.

For example, if you claimed the employment allowance against a sole trade business which only had a liability for employers National Insurance throughout the year of £1,600, the remaining £400 not utilised could be transferred to reduce the employers National Insurance due in another sole trade business.

If you have any questions regarding the entitlement of your business/businesses to the allowance then please contact your client manager or our payroll team who will be happy to help you.

This article was compiled by Phil Auckland.

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