Businesses Can Reduce Tax Via Unused Employment Allowance

21st Sep 2020
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It’s now possible for businesses with unused Employment Allowance to reduce other tax liabilities instead. Find out more.

Reducing confusion

The government has recently confirmed that employers who have unused Employment Allowance remaining when the tax year ends, and who wish to delay their Employment Allowance claim, can use the allowance against other tax costs instead.

This new guidance has come about following apparent taxpayer confusion around when (or indeed whether) they should claim the allowance after receiving a grant for staff furlough payments under the Coronavirus Job Retention Scheme (CJRS).

The official guidance states that the rules around claiming Employment Allowance are unchanged if a company receives a Job Retention Scheme grant to cover costs related to Class 1 NICs. This means there’s the opportunity to reduce tax burdens elsewhere if there is unused allowed left over; a move welcomed by many employers.

How should it be calculated?

Employers who have previously obtained a grant for employer National Insurance contribution costs via the CJRS should deduct the amount of grant they have received from the amount of Employment Allowance they have left over. If they don’t, then they’re effectively receiving the same relief twice over, and that would be classed as fraud - certainly best avoided.

It means that the Employment Allowance can be used against other tax liabilities, providing the relief is claimed after the period when the CJRS grant was received.

Rule change for 2020

Employers also need to be aware that this year HMRC slightly changed some of the rules around Employment Allowance claims. The changes kicked in on 6th April 2020, and mean that an employer’s Class 1 National Insurance Contributions liability for the prior tax year must be less than £100,000. Additionally, the company must not have claimed state aid amounting to more than its trade sector threshold for claiming Employment Allowance.

If you would like to discuss this with us, particularly around how it may affect your client’s R&D Tax Credits claim, please do get in touch.

The Employment Allowance: A quick rundown

The Employment Allowance means that certain UK businesses can cut their Class 1 annual National Insurance (NI) bill by as much as £4,000. The current guidance applied to the 2020/21 tax year. The vast majority of UK companies are eligible.

Who isn’t eligible to claim?

You cannot claim Employment Allowance if:

  • The business only has one employee and that employee is paid above the Class 1 National Insurance secondary threshold. This is currently £8,788 for the 2020/21 tax if year
  • The only employee of the business is also a company director
  • More than 50% of the company’s work is carried out on behalf of the public sector
  • The claim is in relation to the personal employment of a domestic worker (a gardener, cleaner or nanny for example)

Most contractors and freelancers (who pay Class 4 and Class 2 NICs) will also not be eligible for the allowance as they don’t pay Class 1 NICs.

Are there any exceptions?

Yes. Some exceptions exist to the public sector rules, for example if a business supplies IT services to a local council or government authority then they may be eligible. Another exception would be if a business provides security or cleaning services specifically for a public building, such as public toilets or local authority offices.

This is looked at in more detail on the Gov.uk website.

How does it work?

Eligible businesses can use up to the £4,000 limit each tax year.

Employer NICs are usually charged at 13.8% (see the Gov.uk website for current employer NIC rates). A full-time employee with a salary of, say, £22,000 will bring about Employer NICs of £151.94 a month which is £1,823.26 a year. So, a company with one non-director employee paid £22,000 and claiming the Employment Allowance will not attract any employer NICs for that tax year as their £1,823.26 is less than the £4,000 allowance.

Now we look at someone earning a higher salary, of say £43,000 a year. They will generate employer NICs of £4,721.26 a year. So under the Employment Allowance, the first £4,000 is not counted, leaving only £721.26 to be paid for that tax year.

Remember, employer NICs of more than £4,000 will only be paid when the Employment Allowance limit has been reached. This means that for the example above, an employer wouldn’t be liable for any employer NICs for the first ten months of the tax year. Then in the eleventh month the liability would be £327.84, and £393.42 for the twelfth month. This makes up the total of £721.26 due.

Note too that the Employment Allowance of £4,000 is not per employee - it’s per business.

How is the Allowance claimed?

The Employment Allowance will be subtracted automatically from employer NICs by their payroll software, providing the business is eligible.

Have one of your clients undertaken any innovative R&D work recently?

Then don’t let them miss out on R&D Tax Credits too. Government-backed and open to all UK companies, it’s a highly lucrative tax incentive to encourage business growth.

R&D Tax Credits in brief

R&D Tax Credits are open to innovative UK companies, and the credit is set against their Corporation Tax to reduce their liability. Loss-making companies can also claim, and will receive the benefit as cash instead.

To be eligible, companies must have undertaken R&D work that addresses a particular scientific or technological uncertainty. This may be work to create a brand new product, service or process from scratch, or in the upgrading/improvement of an existing one. The relief then helps to cover a large percentage of the R&D costs.

The scheme is split into two branches - SME and RDEC. The one a company must use depends on its size and whether it has received any state aid previously

If this sounds like one of your clients, we strongly recommend reading our R&D Tax Credits page for more details.

Why would an experienced accountant like myself need Myriad Associates?

Applying for R&D Tax Credits is complex. The legislation isn’t always clear, and it’s all too easy to submit a claim that doesn’t match HMRC’s strict criteria. Additionally, even the most innocent of mistakes can lead to a lengthy tax investigation - something you and your client really don’t need.

We only deal with R&D funding and tax relief. It makes us experts in the field and we can work alongside you and your client in compiling a fully optimised, accurate claim. Plus you can rest assured that with our 100% success rate your time is freed up to get on with the day job.

Speak to the team today on 0207 118 6045 or use our contact form - we’ll be pleased to have you on board.