Reduction for employers in the UK, i.e. Employment Allowance

Since 2014, companies have been able to take advantage of the employment allowance – a special allowance for employers when they take on new employees. Of course, it is not available to everyone. To obtain the allowance, several primary conditions must be met. But what are those conditions, and what exactly is included in the allowance? We will discuss this in our article.

Employment allowance – what is it?

As an employer, you are required to pay social security contributions for your employees. This obligation also applies to directors of ltd companies. The employment allowance is a reduction for employers in the UK, allowing them to significantly reduce national insurance liability by up to £4000.

The amount has been changed many times over the years. Originally, after the amended law on social security contributions was introduced in 2014, it amounted to £2,000. The first reform of the regulations took place in 2016, when, among other things, the amount of the allowance was increased to £3,000, and sole proprietorships were excluded from the possibility of obtaining it.

Under the current legislation, the amount of the allowance is £4,000. Companies whose NIC (Total National Insurance Contribution) is less than £100,000 can apply for the employment allowance. The condition for receiving the allowance is not to exceed the total ‘de minimis state aid’ obtained so far in a given year.

If you do not know whether your company has a chance to receive such an allowance, our accounting office in the UK can help you. They will perform all the necessary calculations for you and assess if your application will be approved. Remember that in the era of the coronavirus pandemic, any government assistance can be worth its weight in gold – so don’t waste your chance to get the employment allowance.

Tax relief for employers in the UK – who has the best chance of getting it?

Employment Allowance is a reduction prepared primarily for owners of small or medium-sized companies. As mentioned before, for a chance to get one, the NIC of your business must be more than £ 100,000. However, this is not the only condition that you must meet.

To be able to apply for such a reduction, it will be necessary to hire an employee. In other words, you cannot be the only employee of your company. If you are a director of a sole proprietorship LTD, you will not be entitled to the reduction for employers in the UK.

To take advantage of such a reduction, you will have to hire at least one employee. This applies to both residents of Great Britain and legally employed immigrants. Be sure to carefully check the amount of NIC contributions you pay on behalf of your employees. If you have any doubts or questions, our accounting office in the UK can help you.

How to get Employment Allowance for your company in 2022?

If you are interested in getting this grant, there are a few things you need to keep in mind. First of all, a lot depends on whether you have already received an employment allowance before. If so – and if your company is still eligible – NIC contributions will not be deducted until you have used up your allowance. However, remember that each employment of an employee in your company will increase the total NIC contribution that you will have to pay. Once you reach the £100,000 threshold, your eligibility for this grant will be forfeited.

If you have not yet used your quota, you can submit your application at any time during the tax year. You can also apply for such a benefit up to 4 years after the end of a given tax year. If you are a director of a Ltd company and have paid PAYE on an ongoing basis, the relief will be applied to your future receivables.

You should remember that the tax relief in question for employers in the UK is granted to the company and not to the employee. This means that its amount is constant regardless of how many employees your enterprise employs. We will discuss some examples of situations later in our article.

Employment allowance – how to calculate the allowance?

The employment of an employee in England is associated with certain obligations. It is necessary to pay taxes and various types of insurance premiums. One of the basic contributions is social insurance, defined as the NI Class 1 rate. So let’s check what the application of such a reduction will look like in practice.

In the first variant, let’s assume that your employee earns £ 20,000 annually. The NI Class 1 stake will be exactly £ 1,439.62, which is much lower than your limit. In this case, you will not pay a single pound in social security for the employee.

But what if the accounting office in the UK calculates that you have exceeded the limit? In that case, you only pay over £ 4,000. For example, if the employee ID is £ 5,500, you will only pay £ 1,500. So, this means that even if your employees’ NI exceeds the allowable limit, the employment allowance will continue to protect your company up to that limit.

Relief for employers in the UK and Ltd

You can also apply for employment allowance by running a Ltd company in many cases. However, there are some limitations.

Above all, remember that your business cannot be a one-person business. As we have emphasised several times, to obtain this grant, it is necessary to hire an employee in England or other countries in the United Kingdom.

It is possible to obtain such an allowance even if your company employs two directors. However, both of them should earn above the second NIC contribution threshold.

In turn, you will not be entitled to the discussed relief in one more situation. You cannot count on it when running a Ltd company also if you hire employees, even if your remuneration exceeds the income threshold.

The requirements necessary to obtain the grant in question can be pretty demanding. Remember, however, that due to the prevailing pandemic, reducing your social security receivables may turn out to be a real salvation. It is certainly worth trying to obtain it, especially since our accounting office in England can help you with this professionally.

How to increase the amount of the allowance for employees?

Since every employee hired in England reduces the available quota, the natural remedy is to split the company. Nowadays, more and more enterprises have decided to do this. Most importantly, it is a fully legal practice. While this allows you to reduce your tax and claim your employment allowance several times, remember that there are some consequences for doing so.

You have to take into account the rising costs of such an endeavour. Although dividing the company will allow you to avoid high tax, for example, accounting costs increase. Also, remember that both “parts” should focus on separate services after the company’s division and preferably provide them in different places. Otherwise, it may turn out that the discussed relief for employers in the UK will be granted to only one of them.

In connection with the above-described potential difficulties, you should decide to cooperate with professionals. Our accounting office in Brentford will help you determine whether applying makes sense in your case. You will also learn what impact the employment of another employee will have on a positive or negative decision in this regard. Also, remember that splitting up a business will not always be profitable. Our accounting office can also help your brand prepare an individual strategy and will be able to advise you where appropriate. 

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