What is the Employment Allowance for limited company directors?

Contractor’s Question: In a bid to make my money go further in 2021, I’d like to use the Employment Allowance. But what is the Employment Allowance exactly, and is it available to me as a limited company director?

Expert’s Answer: The Employment Allowance is available to eligible employers in the UK each tax year and reduces an employer’s National Insurance liability and, therefore, their PAYE tax bill.

For the financial year 2020/21, the Employment Allowance has been set at £4,000 and could be a significant reduction in tax for the small businesses it is intended to help, particularly in what has been a very challenging year.

calculating employment allowance

Blocked for many contractors

However, in April 2016, new eligibility criteria were introduced, and this change has meant that many contractors operating through their own Personal Service Company (PSC) have since been unable to benefit from the allowance.

From April 6th 2016, you are unable to claim the Employment Allowance if:

  • You are a company with only one employee paid a salary above the Class 1 National Insurance secondary threshold (i.e., more than £8,788 for the 20/21 tax year); and
  • The employee is also a director of the company

This means you will likely not qualify for the Employment Allowance if you are the sole director and employee of your company. This 2016 provision often rules out many contractors from taking advantage of the Employment Allowance.

Potential ways to claim the Employment Allowance

However, if you employ anyone else in the business and they are paid more than the Class 1 National Insurance secondary threshold, you may be able to claim this reduction in your PAYE bill.

There are other eligibility criteria to consider too, and the allowance is only available to employers whose Class 1 National Insurance liabilities were less than £100,000 in the previous tax year. It is also classed as ‘de minimis state aid’ so if your business receives any other state aid, you must check that you do not exceed the threshold. Full details can be found online here.

How can my business make a claim?

For those eligible to claim, you simply need to advise your accountant that you wish to do so, and they will update their Employer Payment Summary submissions to HMRC.

If you handle payroll yourself using HMRC’s Basic PAYE Tools, you need to select ‘Yes’ in the Employment Allowance indicator field. HMRC will then automatically apply the £4,000 allowance until it has been used up or the tax year ends.

Although it is best to claim as soon as possible, you can update your submissions and apply for the allowance at any point in the tax year. If you have overpaid employers’ National Insurance, you may be due a rebate and can apply for the allowance for the previous four tax years provided you were eligible.

Lastly though, as with any accounting matters, it is always best to speak to a qualified accountant about specific circumstances and ensure you get the right advice before taking any action.

The expert was Joanne Harris, technical commercial manager at contractor accountancy firm SJD Accountancy.

Tuesday 1st Jun 2021
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Written by Joanne Harris

Joanne joined the Optionis Group in 2009 as an account manager, working closely with our agency partners. After developing an interest in the technical aspects of the role, she took the opportunity to train as a chartered accountant. She is now fully qualified, and a member of the Association of Chartered Certified Accountants (ACCA).
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