Employment allowance: will this be taxable?

Is there anything to indicate that the employment allowance will be tax-free, like the PAYE online filing incentives a few years ago? Otherwise it is really an employment allowance of £1600 or less, depending on the tax rate of the employer, despite the Prime Ministerial press release headline 'a £2,000 a year tax cut for businesses' on 14/10/2013.
Any views on whether the accounting treatment should be to net this off employer's NI or show it as a separate income line?
  • Further practical issue relating to directors' NI and the employment allowance.
    For a payroll where the only NI relates to directors, it would appear to be best to use the 'alternative basis' for calculating employer's NI to secure the benefit of the employment allowance during the first few months of the tax year. What then happens if circumstances dictate that by the time the adjustment to an annual basis is made, the employer's NI liability was less than the employment allowance already claimed?
    Would the 'excess' employment allowance be clawed back?
    The detailed guidance states 'the maximum award you can have in a year is the lesser of the total of your Employer Class 1 NIC and £2,000', but does not address the issue of directors' NI.

    An extreme example would be to pay £10000 salary in month 1 to a director on the alternative basis, using up £1288 of the employment allowance. Should no further salary be paid then by month 12 on an annual basis the employer's NI for the year would be only £282. Would the £1288 be deemed to have been paid and would this therefore entitle the company to a refund of £1006 overpaid NI?

  • I think there's a misunderstanding behind the question.  The NIC Bill creates the EA as an entitlement for any employer that's not excluded (eg, local and public authorities and organisations delivering their services) and provides the power for regulations to be made to mandatorily set the EA off against the first available employer NICs each year.  The entitlement to a refund will only arise after the end of the relevant year.  The Bill says this (with my underlining):

    "If under HMRC’s arrangements a person is permitted to make a deduction
    from a qualifying payment, the person must make the deduction and must
    make it before any other deductions which the person is permitted to make
    from the payment under any other legislation."

    So it must be netted off against secondary NICs, reducing payroll on-costs and increasing taxable profits (or reducing tax-deductible losses).  There's no tax-free element.

    As to directors, the statutory position is that you take the whole of the employee threshold (£7,956 pa next year) against the first available payments, so you only ever have a liability for £282 in the example given, so you can't legally overpay, which means you can't claim EA against any excess.  So the EA is limited to £282. 

    If you take the concessionary option of treating the director as an employee, you do overpay, but the excess is not NIC in law unless and until more earnings are paid.  You would get the £1,006 back, but it's never legally due as NICs so you can't claim EA against it -- you just get the £1,006 back at the year-end.