The employment allowance has been a valuable saving for many small employers, allowing them in the last tax year up to £2,000 in savings on their National Insurance contributions. From the start of the new tax year this allowance was increased to £3,000.
However, the legislation relating to the allowance is confusing and new rules which came into force this tax year prohibit directors from claiming the allowance if they are the only employee in the company.
Where the debate arises is when you read the legislation relating to this change. This states that in order to qualify for the allowance, where the director is also an employee, there must be at least one other ‘secondary contributor’.
The Revenue tell me that they have received many calls to their Employer Helpline regarding when the allowance is, or isn’t applicable. The response they are giving is that there should be a second employee who has to be earning above the National Insurance secondary threshold of £156.00 per week.
This view is backed up in their guidance notes which states: “From 6 April 2016, limited companies where the director is the only employee paid earnings above the Secondary Threshold for Class 1 National Insurance contributions will no longer be able to claim Employment Allowance. If your company circumstances change and more than one employee or director earns above the Secondary Threshold, you’ll be eligible for Employment Allowance for the whole tax year.”
However, the legislation does not mention this secondary threshold. As Rebecca Cave recently pointed out in her article “Companies tricked out of Employment Allowance” the definition given in statute for ‘secondary contributor’ is merely a paid employee.
This isn’t the first time that the guidance given by HMRC differs to tax legislation. So, what do we do? My interpretation of the law, as it stands today, is that if you employ yourself as a director and also another legitimate employee then you are eligible for the Employment Allowance.
Of course, this could all change if the legislation is amended to fit the guidance. However, for the meantime I would suggest this is a reasonable course to take.