One-man companies can no longer qualify for the employment allowance (EA). However, the latest official guidance indicates that this rule may be easy to dodge. What’s the full story?
Tax on employers
The employment allowance (EA) was introduced in April by the government as a reduction in what it called the “tax on employers”, that is, employers’ NI contributions. The EA was originally worth upto £2,000 for most employers. This was increased to £3,000 from 6 April 2016, but with the caveat that one-man companies were no longer entitled to it.
Easy to dodge
New legislation was drafted at the end of 2015 to put the new rules into effect. However, it seemed to contain a huge loophole which would allow a one-man company to qualify for the EA by paying a minimal salary to a second employee, say the company owner’s spouse.
In February 2016 David Guake, the Treasury Financial Secretary, made a statement about the loophole, implying that it didn’t exist and that rules had been misunderstood. Around the same time HMRC published it’s February 2016 employer bulletin, which in broad terms said, we’ll let you know later how the new EA rule works. Understandably employers, and even tax experts, were confused.
Loophole still there.
HMRC’s April 2016 bulletin contains a summary of it’s guidance on the new EA rules. While it waffles around the subject, in effect it confirms that the loophole, albeit slightly smaller than it was originally thought to be, does exist.
Tip. As a one-man company you can qualify for the full £3,000 EA by paying another employee, say a casual short-term worker (even your spouse or partner), just £157 for a week’s work. However, you need to pay yourself a salary well in excess of £11,000 per year to gain a decent saving from the EA, which may not be tax efficient.