It sounds great, doesn’t it. A £2,000 tax give-away.
To be fair if you own a small business with (say) 5 or more employees, then it does do what it says on the tin. It will save the company the first £2,000 of its Employers National Insurance due.
What it does not do is give each employer £2,000 irrespective of the size of their payroll, nor is there any cash to be received – just less paid.
On the administration front it’s a very simple scheme. The payroll runs as normal. The only report that changes is the report that calculates how much should be paid to HMRC. The Employers National Insurance is reduced to nil each month until the full £2,000 of the allowance is used up and then the reports (and payments) revert to their normal pattern. There is no extra administration or application procedure for the employer. You payroll package might ask you to tick an extra box as part of the ‘setting up the new tax year’ process, but that is it.
How does it affect the smaller owner managed business?
Most owner managers pay themselves a minimal salary and take the balance of their remuneration out of the business in the form of dividends. There are several reasons for this that I will address in the forthcoming ‘Tax Fit’ article but one of them is that a higher salary attracts a higher marginal tax rate when you take into account PAYE, Employees and Employers National Insurance. As the alternative to a salary is dividends, which do not attract National Insurance at all, then, in very generalised terms there is no point in having a higher salary.
The Employers Allowance reduces the marginal tax rate of a salary a little. The optimal salary increases from £663 to £833 (which increases the taxable costs of the company and therefore reduces the Corporation Tax) giving a tax saving of (very roughly) £160 per year.
The downside is that if you were not previously paying PAYE/NI on a monthly or quarterly basis then you now have a new admin task, as, at £833, there is a small amount of Employees NI to pay.
The allowance is unlikely to continue into the next tax year as, though there have been no announcements yet, I would put my money on either no allowance or one aimed at employing under 21’s.
Consider whether the hassle factor is worth the saving before making a decision.
To find out more about RJ Wilber Chartered Accountants visit http://rjwilber.co.uk
For further details, individual advice or assistance in any matter regarding tax for owner-managed businesses contact Rebecca Wilber 01789 774 737 or Email rebecca@rjwilber.co.uk
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