The £2,000 National Insurance giveaway – how will it work?
10 March 2014
In his budget back in April 2013, George Osborne announced as his centrepiece, a £2,000 employment allowance which had been carefully crafted to appeal to small businesses and removes the first £2,000 of employers National Insurance contributions. The tax cut is estimated to effect 35,000 charities, 1.25 million businesses with 450,000 businesses being taken out of paying employers National Insurance altogether in 2014 to 2015.
Available from April 2014, and putting this into context, the £2,000 allowance is sufficient to cover the Class 1 National Insurance liabilities of four employees on the minimum wage or one employee earning approximately £22,000.
Whilst the government have produced a substantial amount of material on this measure we are still being asked a couple of key questions by local businesses.
Can all businesses claim the allowance?
If your business falls into any of the following categories you will not be able to claim the Employment Allowance:
- Suppliers of personal, household and domestic workers;
- Public authorities;
- Companies who carry out work which is mainly of a public nature i.e. where 50% of their work is for the public sector;
- If you are caught by the IR35 provisions for Personal and Managed Service Companies and make a deemed payment.
One point to note, is if you provide security and cleaning services for a public building or supplying IT services for a government or local council you are not carrying out a function of a public nature.
How does it work?
Whether you use your own software or the HMRC basic PAYE tools, when making the claim you reduce your Employer’s Class 1 National Insurance amount until the allowance is used up. For example:
If company ABC Limited calculated their Employer’s Class 1 National Insurance as £750 per month then in month 1, April 2014, the company would use up £750 of the allowance and carry forward £1,250 to May 2014.
Assuming the figure remained the same in May 2014 the company would claim another £750 leaving £500 to carry forward to June 2014. When repeating this process in June 2014 the company Employer’s Class 1 National Insurance totalling £750 would be reduced by the carried forward amount of £500 thus reducing their payment to £250 and now the allowance would be fully utilised.
Tax Planning points
As this relief appears to be available one man band companies, it leads us to consider a change of profit extraction strategy from 6 April 2014 as it will be more advantageous to increase directors’ salaries to £10,000 instead of the NIC threshold of £7,956.
The extra £2,044 will save £409 (20%) corporation tax (£818 for two directors) whereas the additional employees NIC would be just £245 each. For example:
Two director/shareholder company – from 2014/15:
Salary – £9,755 net = gross £10,000
Dividend up to BR band £28,678 net = gross £31,865
Top of BR band £41,865
Net cash extracted (each) £38,433
Total extracted £76,866
There would however be 20% corporation tax payable.
Profits before tax £71,695 @ 20% = £14,339 corporation tax, thus profits before salaries and tax would be £91,695.
This results in an overall tax and NIC rate of just 16.2%.
A salary in excess of £10,000 would attract income tax (at 20%) and employee’s NIC at 12.2%.
Contact us now on 01206 51247601206 512476 or email us to find out more about how the employment allowance would affect you and your business.
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