Employment Allowance Contractors
There has been some confusion on whether the new Employment Allowance Contractors and Small Business announced by the government in the budget on 11 March 2014 would qualify. It has been confirmed by the HMRC that:Employment Allowance is for nearly all employees that pay Class 1 National Insurance contributions on their employees and directors earnings”.
Employment Allowance is for nearly all employees that pay Class 1 National Insurance contributions on their employees and directors earnings”.
By Class 1 National Insurance means the Employers National Insurance element only and not Employees National Insurance. Of course where your company or you do not pay any Employers National Insurance then this Employment Allowance will not be applicable.
This means that the Employment Allowance for IT Contractors can claim the Employment Allowance if their salaries from their companies are set at such a level that attracts Employers National Insurance. This will mean that many IT Contractors will not pay any Employers National Insurance receiving a credit of up to £2,000.
The £2,000 allowance does not mean that there will be any refund if this allowance is not used. The £2,000 is simply the maximum Employers National Insurance that can be claimed back against the companies total Employers National Insurance liability.
It is estimated that 450,000 business will not pay Employers National Insurance. The Employment Allowance Contractors will constitute some of this number. This allowance however has only been introduced for the 2014/15 tax year. Whether this will be extended to future tax years is yet unknown.
Businesses that cannot claim the Employment Allowance include, General Practitioner Services and other government related organisations. This includes refuse collection, NHS, prison services and so on.
The HMRC have clearly stated that:
Personal and Managed Service Companies who pay contract fees instead of a wage or salary, may not be able to claim the Employment Allowance, as you cannot claim the allowance for any deemed payments of employment income.
Service companies can only claim the allowance, if you pay earnings and have an employer Class 1 NICs liability on these earnings.
A service company is where the services are being provided personally by the shareholder. This means that many contractors operating through a limited company may be regarded as personal service companies. If the contractor operating under a service company is deemed to be a “disguised employee” of the end client, then earnings from the company will be employment earnings. If this is the case then the Employment Allowance can not be claimed. An IR35 review is provided by Power Accountax – Accountants Contractors to assess this risk.
Should the Employment Allowance be claimable, then this is usually automatically claimed by the payroll software. This allowance should show as a credit against the companies PAYE/NI schedule for the month. If this credit does not appear ask questions! You can find specific guidance on the HMRC website