Swings and Roundabouts on Employment Allowance

The employment allowance was set at £2,000 for the first two years of its existence. For 2016/17, the allowance has been increased to £3,000. So you can reduce the amount of your employer class 1 national insurance contributions (NICs) payable to HM Revenue & Customs (HMRC) by this amount throughout the year.

The employment allowance is targeted at businesses that support employment, and for 2016/17 will cover your NIC cost of employing four adult full-time workers earning the national living wage for those aged 25 or over.

However, the allowance has never been available for employing someone for personal, household or domestic work, such as a cleaner, nanny or gardener. However, it can be claimed by employers of care and support workers. What’s more, from 6 April this year, you no longer qualify if you are the director and only paid employee of your company.

Qualifying employment

This will not make too much difference if only a low level of remuneration is taken, with profits mainly withdrawn as dividends. However, the situation may be more serious for contractors who, regardless of whether or not the IR35 rules apply, often take a much higher level of remuneration. The after-tax cost of losing the full allowance for 2016/17 is £2,400.

Just having employees or another director is, in itself, insufficient to continue qualifying for the allowance. You will only qualify if your earnings from the company are high enough to be subject to employer NICs. This means that an employee’s weekly earnings have to be at least £156 (£676 monthly), while a director needs annual earnings of £8,112.

The full allowance of £3,000 will be available provided you qualify at some point during 2016/17. But a word of warning if you think that simply employing your spouse or partner for one week is good enough: you cannot qualify for the employment allowance as a consequence of avoidance arrangements.

By contrast, employing a seasonal worker for one or more weeks would be fine, provided their earnings are high enough. HMRC also gives the example of a person who is the only UK-based employee of an international company. When it comes to the employment of a spouse, partner or family member, the employment needs to be genuine: in particular, HMRC will be less likely to query long-term arrangements.

Get in touch with us if you are uncertain about your status.