The Employment Allowance formed the focus of the Chancellor’s budget in March. It is planned for implementation in April 2014 and inched closer to becoming law with the first reading of the Bill last month. The government has dressed up this reduction in the Employer Class 1 NICs bill of up to £2,000 a year with a raft of tantalising figures.
Businesses employing five full-time adults on minimum wage will see a cut in NICs – the tax they pay on their employees – of over 80%. Meanwhile, according to government figures, 450,000 businesses will be taken out of paying employer NICs altogether next year – business will be able to employ one worker on a salary of £22,400, or four employees working full-time on the adult national minimum wage, without paying any employer National Insurance contributions at all.
Prime Minister David Cameron claims the Employment Allowance will help more companies to start up and expand, which is important, he says, because “small business and entrepreneurs are the lifeblood of our economy”. Introducing the bill to Parliament he said: “An ambitious and thriving small-business sector is vital for steering economic recovery in the right direction and helping the country succeed in the global race.”
According to government the measure will be especially welcomed by smaller businesses seeking to hire their first employee or take on additional employees, as it will reduce the cost of employment. Around 90% of the benefits will be seen by smaller firms, it claims. The Federation of Small Businesses agrees, saying the measure will free up cash to spend on expanding businesses.
National chairman John Allan says: “The NICs Employment Allowance is a measure our members have warmly welcomed. It will have a positive impact on small firms and the economy when it comes into force next spring. Our members have said they’ll spend the savings on their companies, either through investing in the business, increasing wages or taking on staff.”
Head of the BPIF’s legal division Anne Copley tempers the good news: “Anything that saves employers a bit of money is a good thing. However, NI contributions are quite high and even though the government trumpets this as a help to small businesses, you would have to be a micro-business for it to have a big or even a notable impact. It’s a bit of a puff.”
With a few exceptions, the employer has to pay 13.8% on earnings in NIC, she explains. For a staff member on £150 a week, such as “Betty in the bindery” who works part-time in busy periods, this works out at just over £20 a week, or £1,040 a year. 10 such Bettys would clock up £10,400 a year in NICs that the employer must pay. Employees, of course, still have to pay their own National Insurance contributions.
The weekly NIC on a skilled printer earning £500 a week, however, would be £69, which over the year adds up to £3,588. 10 skilled printers on the shopfloor would clock up £35,880. From April 2014 the Employment Allowance will lop off at most £2,000 from that grand total. “Something is better than nothing,” says Copley, “but it’s not a huge amount, is it?”
That said, printers should call their accountants or talk to their payroll departments to make sure they recalculate and benefit from the changes from next April, says Copley.
The government insists it will keep the process simple for employers, with the allowance to be delivered through standard payroll software and HMRC’s real time information (RTI) system.
Forum of Private Business head of policy Alex Jackman welcomes the new allowance but questions whether it will lead to job creation – one of the primary reasons given by the government for the introduction of the National Insurance Contributions Bill last month. Most firms, he reckons, will spend allowances trying to offset the spiralling costs of conducting business.
“We welcome it and hope it encourages employment,” he says.
“It is a good incentive for cash-strapped small companies facing increasing costs in recent years. However, it is highly likely the £2,000 will be used by businesses to lessen the impact of some of those cost increases rather than significantly driving employment.
“The government needs to look at tackling some of the biggest costs to small businesses including energy bills, business rates and the cost of regulation to create the right conditions for employment.”
Ellie Gamble, an associate director at tax specialist Grant Thornton, says at a macro level of multinationals and big business the Employment Allowance is a “drop in the ocean”. At the micro-level of small businesses totting up the figures on affordability of staff, however, that £2,000 allowance could almost certainly tip the scales in favour of taking on a new member of staff.
“It’s £2,000 for everyone across the business, so for people with hundreds or thousands of staff it’s not much. The Employment Allowance will be no game changer, but 80% of UK businesses employ six or fewer people, and if you’re one of those businesses whipping out a pair of
old-fashioned scales to weigh up the pros and cons of taking somebody on, it is great.”