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Could your business benefit from the £2,000 Employers’ NI allowance?

March 22, 2013

The most talked-about small business announcement from Budget 2013 is the implementation of a new ‘Employment Allowance’, which will reduce firms’ Employers’ NI bills by up to £2,000 from April 2014.

In order to kick-start the economy, the Chancellor is clearly aware that small businesses need as much help as they can get in order to invest in new staff.

This is noted in the Budget document; “Small businesses report that costs of employment are one of the biggest barriers to success they face.”

Small businesses are often heralded as being the ‘backbone’ of the UK economy, so any measures to encourage firms to expand are welcome. This is especially so, when Budget 2013 brought no other significant policies aimed specifically at small businesses.

How will the new allowance work?

This new ‘tax off jobs’ would mean that a small firm which employed an extra worker on a £22,400 salary, or four staff on the National Minimum Wage, would have no Employers’ National Insurance Contributions to pay at all. (In fact, 450,000 firms would pay no Employers’ NI at all, according to Treasury forecasts.)

All charities and businesses will be eligible to claim the Employment Allowance, which will be realised on a cumulative basis via the new Real Time Information (RTI) payroll system, which goes live in April 2013.

The Government says that the new scheme will be easy to administer; employers will only need to confirm their eligibility via their regular payroll processes.

Of course, how much your own firm may benefit from the new allowance depends on how you currently remunerate yourself, and your staff. The concession is aimed particularly at small businesses who may have been reticent about taking their first employee.

For one-man-band limited companies, however, the benefits may be minimal. Many professional contractors, for example, pay themselves a small salary (typically beneath the prevailing income tax and NIC thresholds).

Therefore, in order to take advantage of any Employers’ NI savings, they would have to pay themselves a significantly higher salary, on which additional income tax and Employee’s NICs would be payable.

You should talk to your accountant to find out how the new employment allowance could benefit your firm before it goes live in April 2014.

Business Reaction

Unsurprisingly, the NI cut has been roundly welcomed by industry commentators.

Professor Stephen Roper, director of the new £2.9m Enterprise Research Centre said: “The Employment Allowance is useful as it means that many of the smallest firms will pay no job taxes. It is ironic, however, that in cash terms the Employment Allowance is also worth least to very small firms who may be feeling the worst effects of slow economic growth.”

Stephen Herring Senior Tax Partner, BDO LLP, welcomed the announcement, but was surprised at the lack of other measures directed specifically at SMEs: “There were precious few measures supporting them in Osborne’s Budget and given their potentially crucial role in the UK’s economic economy, the Chancellor may have missed a trick here.”

John Cridland, the Director-General of the CBI said: “Small and medium-sized businesses will be particularly encouraged that there was money available for the Chancellor to cut the jobs tax through a new employment allowance. We also need to remember the impact of business rates on the hard-pressed high street.”

What happens next?

It should be noted that the new policy will not be implemented until April 2014, by which time the eligibility criteria may be changed. In the meantime, the Government states that it will “engage with business representative bodies on the details of the design and operation of the new allowance.”