The Employment Allowance – the implications for small businesses

The success of our many small businesses is an important part of the country’s economic recovery at both a local and national level. Furthermore, whilst by their very definition, individual SMEs employ only small numbers of people, their combined potential as an employer is huge. In fact, according to the Federation of Small Businesses, SMEs employ over 14.4 million people and account for at least 47 per cent of private sector employment in the UK.

However, one area that small businesses have struggled with during tough economic times is maintaining staffing levels. With the government eager to build on the more optimistic employment figures released recently which show a consecutive four month rise in employment, finding ways of encouraging SMEs to employ more staff has been an important item on the government agenda. They are also keen to look at ways of reducing youth unemployment, which remains a troubling issue.

Supporting SMEs to become employers

The Employment Allowance (EA), which was first unveiled in the spring Budget, is an important part of the government drive to support small businesses in employing more staff. With the first reading of the National Insurance Contributions Bill taking place last month (October), the scheme is set to be launched in April 2014. In brief, the allowance will take the form of a credit of up to £2,000 against an employer’s National Insurance bill.

Who can claim?

Under the scheme, small businesses that employ 250 staff or less, as well as charities and community amateur sports clubs, will be eligible for NIC reductions.  The EA figure of 250 employees includes companies where the only people on the payroll are directors. Whilst the introduction of the EA may tempt directors out of the practice of paying themselves via dividends to avoid paying NICs, each case needs to be considered on an individual basis as increasing a director’s pay to qualify for the EA may not always be financially advantageous.

Making a claim

Fortunately, it looks as if the EA will be easy to claim – possibly in recognition of the fact that the last thing any SME wants is to increase the admin burden that comes with employing staff. HMRC is working with payroll software providers to ensure that their products include a simple one time “yes/no” box that can be ticked to confirm your company is entitled to claim the EA. The software should then do the rest and knock off the credit from your employers’ NI liability. If you use HMRC basic RTI PAYE tools, these will be updated to take account of the EA. However, it is currently unclear whether the £2000 credit will be taken as a lump sum or a monthly credit – no doubt all will be revealed over the coming months.

Putting theory into practice

So what does the scheme mean to organisations in real terms? According to HM Treasury, a company with 5 full time employees who receive the national minimum wage would have a tax cut of 80% (from £2430 to £430) under the terms of the EA, whilst those with 10 full time staff at NMW would save 40 per cent.  In addition, those companies with an NIC bill of less than £2000 annually would pay nothing from April 2014. The Treasury estimates that this will benefit around 450,000 businesses during the first 12 months of the scheme. This also means that a company could take on its first employee and pay them up to £22,400 with no NIC to pay.  Companies who would like to calculate how much they could save under the new scheme can use the Employment Allowance calculator provided on the website at

Whilst National Insurance concessions in the past have included NIC holidays for employers in specific geographical regions, in his March announcement, Chancellor George Osborne heralded the EA as “the largest tax cut in the Budget”.  The move has also been welcomed as positive for small businesses by the FSB and the British Chamber of Commerce.

How effective the measure will be in offering long term, tangible and substantial support to small businesses remains to be seen. However, with the government also scheduled to launch a consultation to look at ways of tackling late payments, another troubling issue for SMEs, the government seems to be keen to convey the message that it values our small businesses. If nothing else, the Employment Allowance is an acknowledgement of the need to support SMEs in their bid to grow and take advantage of the opportunities offered by the economic recovery.

Carl Elsby is MD of chartered accountants Elsby & Co who specialise in working with SMEs, start-ups and family businesses across the Midlands. For more information, visit, call 01604 678470 or email