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How to reduce your NICs by £2k: introducing the Employment Allowance

In recent years, the Government has tried a number of initiatives to encourage businesses to employ people. One of the latest is the Employment Allowance which has the effect of reducing National Insurance Contributions by a maximum of £2,000. NICs have often been described as a “tax on jobs” and the Government therefore believes the Allowance will enable around 1.25m businesses and charities to take on new staff. The Allowance is available for nearly all employers that pay Class 1 NICs on their employees’ and directors’ earnings. There are some exempted employers, for example, public body employers and someone employed for personal, household or domestic work, such as an au pair or gardener.

If you’re an eligible employer you can claim the £2,000 Employment Allowance, but only against one PAYE scheme, even if your business operates a number of different schemes.

You can claim through your payroll software or using HM Revenue and Customs’ Basic PAYE Tools for 2014 to 2015. When you make your claim, you must reduce your employer Class 1 NICs payment by an amount of Employment Allowance equal to your employer Class 1 NICs due, but not more than £2,000 per year. This means that if your employer Class 1 NICs are £1,200 each month, in April your Employment Allowance used will be £1,200 and in May £800.

Once made, HMRC will automatically carry your claim forward each tax year. So at the beginning of each year you should check your circumstances haven’t changed.

If your business does not use the full £2,000 entitlement against their nominated PAYE scheme, but have employer Class 1 NICs on another PAYE scheme, you are eligible to apply (at the end of the tax year) for a refund of any unused balance.  You will also be able to view how much of the Allowance you have used in the ‘View PAYE Liabilities and Payments’ section upon HMRC’s online portal.

All efforts to cut costs are welcome, but if the amount cut is very small (and £2000 is really fairly small) that has to be balanced against the costs of time spent on completing and filing the necessary paperwork.

Even with schemes of this kind, the costs of employment are considerable and as auto-enrolment affects smaller business the costs will increase further. Most small businesses will attempt to outsource and use self-employed associates to keep their costs at a manageable level.

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