The Employment Allowance
The employment allowance has been increased to £3,000 this year. So what is it and how does it save me money?
Each employee or Director can earn £11,000 each year before they have to pay tax, but National Insurance payments start before this, beginning when your annual earnings reach £8,060.
After the £8,060 threshold is reached the amount of National Insurance payable is 12% by the employee / director, and an additional 13.8% by the employer.
This means that once your salary is over £8,060, for every additional £100 you earn you have to pay £12.00 in NI, and your company also has to pay £13.80, making a total of £25.80 in all.
The Employers Allowance allows almost all employers (there are a few exceptions) not to have to pay the first £3,000 of Employer’s NI that would otherwise have to be paid. The allowance cannot be used against your own (employee’s) NI – it is just set against the company’s (employer’s) share.
For a large business employing many people the allowance will be used up by their staff, but for a company with just one director plus an employee who earns over the NI threshold, the £3,000 allowance means that no Employer’s National Insurance needs to be paid at all.
This lets the Directors draw a salary of £11,000 each, as only 12% NI is paid on the amount between £8,060 and £11, 000, but the saving in Corporation Tax is 20% on this marginal amount. Without the allowance the total NI payable would exceed the tax which could be saved, so this where it saves you money.
The employment allowance can still be used even if you pay less than £3,000 in National Insurance per year.
- You can claim the employment allowance if you are a business playing Class 1 National Insurance.
- You can claim if you have at least one Director and one member or staff whose earnings are above the secondary threshold.
- You cannot claim if you are a sole director with no employees, or if you do have an employee but they do not meet the secondary threshold.
What’s the bottom line?
So, the bottom line is that if you employ at least one member of staff who earns above the secondary threshold, then the “Employers Allowance” will save you money, up to £3,000 per annum.