Employment Allowance and Deemed Employment income

25 June 2021

The off-payroll working rules have been in place within the private sector since April this year (2021). The primary focus has been on medium and large companies who now need to determine the status of workers who are engaged via a Personal Service Company (PSC).  Companies must establish if workers fall within the off-payroll working rules, however, there has been little coverage of how the rules now affect those small companies who provide PSC’s, known as fee payers and how this interacts claiming the employment allowance.

From the tax year 2020, only businesses and charities with a Class 1 NIC liability of less than £100,000 can now make claims for the Employment Allowance (EA). This allowance allows qualifying businesses to offset up to £4,000 against their employer national insurance contributions (NICs).

When establishing an employer’s NIC liability for the year, employers NI that is due on deemed employment payments processed should not be considered – this means that deemed employees will not affect a businesses entitlement to the EA.  However, businesses should be aware that as a result of this, any secondary NICs due on these amounts cannot be offset against any EA that employer is entitled to.

Compliance with this requirement is currently a manual process.  Although an indicator is ticked when processing deemed employment income for PAYE purposes only, the indicator does not make a distinction to the NICs being able to be included in the EA calculations. This means that when an employer is eligible for the allowance, they must ensure that they pay across the full amounts of employer NICs calculated on the deemed employment income, even if they have a positive EA balance and no other employers NICs to offset it against.

Employers who are eligible to claim EA and are processing deemed employment income for those that fall within the off-payrolling working rules are encouraged to keep records separate to their main NICs to ensure that the rules are met. If an employer fails to do so and has included any employers NICS derived from an off-payroll worker engagement, then they will need to inform HMRC at the end of the tax year so that their EA claim can be adjusted, and any outstanding monies paid to HMRC.



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