Employment Allowance – anti avoidance to note

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The Government recently increased the Employment Allowance from £2,000 to £3,000 from 6th April 2016. This allowance benefits new employers by enabling them to save up to £3,000 per tax year from their employer’s (secondary) Class 1 NIC liability.

 

An anti-avoidance provision was also introduced from April to remove entitlement from single-director companies who have no other employees (allegedly because they do not help create jobs). It is of course relatively easy to appoint a second employee (perhaps a spouse as second director/employee) and pay them the tax/NIC efficient gross salary of £8,060 (provided of course they perform sufficient duties to justify this wage).

 

However, we understand that HMRC has recently been telling people, in webinars and on the helpline, that the new block on the allowance for one-person companies also applies even if there is another employee where that employee is paid below the secondary NIC threshold (which is £8,112 for the current 2016/17) with the result that no secondary (employers) NICs are due.

 

This goes against the actual legislation and appears to be a case of HMRC bending the rules as they spot perceived avoidance. According to the legislation it is the payment of earnings to that second employee that gives the allowance, whereas now HMRC apparently now want to see actual employer NIC contributions being made. The answer may be to simply pay that second employee just over the £156 per week secondary Class 1 NIC threshold in order to create a small liability.

 

This problem may be limited in number, as many smaller business owners should be paying themselves by way of the tax/NIC efficient £8,060 salary and dividends (so no NICs would be due at all). But where there are businesses with a secondary NIC bill and just one employee it is important to note this change of stance by HMRC and to take appropriate steps to ensure the Employment Allowance is received.

 

For further information please contact Richard Whitelock