HMRC Misleading PSCs Over NIC Allowance

NIC Employment Allowance guidance may not be correct

Position prior to 5th April 2016

From 6th April 2014 most employers have been entitled to claim the Employment Allowance as a reduction in their Class 1 secondary (employers) NIC liability (not against Class 1A or 1B). At the time it was introduced the Employment Allowance was expected to benefit 1.25 million businesses, 98% of which were SMEs with fewer than 250 employees. It was anticipated that the allowance would wipe out the NIC bill of 450,000 small employers and one third of employers would pay no employers NIC at all.

For 2014/15 and 2015/16 the Employment Allowance was worth £2,000, meaning that every business could employ someone on a salary of £22,400 and £22,600 respectively without attracting employers NIC.

PSCs within IR35 could claim the allowance only against secondary NIC due on actual payment of earnings. The NIC due in respect of the 5th April deemed payment is not covered by the allowance.  

In the summer Budget 2015 it was announced that the allowance would increase to £3,000 but at the same time would be withdrawn for one employee (or director) companies. Clearly this affects the majority of PSCs.  

Changes from 6th April 2016

HMRC have updated their guidance to reflect the changes for single director companies. From 6 April 2016, limited companies, where the director is the only employee paid earnings above the secondary threshold for Class 1 NIC, will no longer be able to claim the Employment Allowance. This is the only stipulation laid down by the amendment to the National Insurance Contributions Act 2014 which states:

A body corporate (C) cannot qualify for an Employment Allowance for a tax year if:

1. all the payments of earnings in relation to which C is the secondary contributor in that year are paid to, or for the benefit of, the same employed earner, and
2. when each of those payments is made, that employed earner is a director of C.

By statutory definition a secondary contributor is an employer in relation to any payment of earnings regardless of the amount. HMRC, however, have conveniently overlooked this and have added an additional employee test in their guidance which states that where a company’s circumstances change and more than one employee or director earns above the secondary threshold, that company will become eligible for the Employment Allowance for the whole tax year. This includes companies where all employees are directors where both earn above the secondary threshold and the company employs husband and wife directors where both earn above the secondary threshold

According to the Revenue, the decisive factor is that the additional employee(s) must be paid above the secondary threshold (£156 p.w in 2016/17). Directors must be paid above the annual secondary threshold (£8,112 for 2016/17, or pro-rata if the directorship began after the start of the tax year).

This is not what the regulations say and so if a one man/woman PSC wishes to continue claiming the Employment Allowance for this year they would only need to employ another earner at some period in 2016/17 which could be as short as one day or a week.

HMRC have been asked to amend their guidance to actually reflect the regulations that Parliament intended and not their own interpretation of them. It may be worthwhile waiting for these to be published therefore before any contractor rushes off to stake their claim.