The employment allowance increased on 6 April 2016 from £2,000 to £3,000 per employer per year. This is great news for small businesses who can set the allowance against employer’s class 1 NIC payable on their employees’ and directors’ pay.
The bad news is the employment allowance is no longer available to companies where the only employee is a director of that company. This restriction was flagged-up over a year ago, and as a result many micro-companies decided to employ a member of the family for just a few hours to break the “one employee” condition. That second employee doesn’t have to be a director of the company.
The regulations that restrict the employment allowance don’t mention a minimum employment period for the second employee, or a minimum level of income. However, the HMRC guidance for one-person companies specifies that the second employee must be paid above the NIC secondary threshold (£156 per week for 2016/17).
It appears that HMRC have read far more into the regulations than is in the law, and as a result HMRC are imposing conditions by guidance rather than by regulation. HMRC have been asked to correct their guidance to accurately reflect the regulations passed by Parliament.
Tip: If you are the only employee of your limited company and you are a director, and you want to continue to qualify for the employment allowance in 2016/17 the only requirement you have to meet is that the company has two or more employed earners for at least one period in the year (which may be as short as a week). An employed earner is a person gainfully employed in Great Britain under a contract of service, or in an office, with earnings. So employ your partner or child for a week on £156 plus, report it HMRC via your RTI filings, and draw a salary yourself up to the personal allowance.