A couple of years ago, the government introduced an annual employment allowance, providing businesses with £2k worth of free employer National Insurance contributions to encourage companies to employ new staff.
The allowance was aimed particularly at helping smaller companies, where having to pay NI as well as salary might be seen as a barrier to recruitment.
An unintended consequence of the allowance was that many one-man business owners took the opportunity to set themselves up as an employer, paying themselves a small salary of £11k in order to save about £360 in tax each year.
To rectify this, the government has made adjustments to how the employment allowance works, bringing in two key changes which became effective from the start of the new financial year.
From 6th April:
What Does This Mean For You?
While increasing the allowance should act as an incentive to any company that may be thinking about taking on new staff, restricting it to companies with more than one director is a fundamental change that’s likely to have implications for many single employee / director businesses.
So, if you’re a director of a limited company as well as its only employee, what should you do?
There are two other scenarios you might want to consider which will allow you to claim the allowance:
Remember though that while directorship does not mean ownership (unless you choose to issue shares as well), it does bring some legal responsibilities, including the requirement to complete a tax return every year.
If you can’t add another person to payroll, then in our opinion, the best option is lowering your salary and taking the £3k allowance as dividend. As this extra £3K is within your tax free annual allowance it does not count as part of your £5K annual dividend allowance.
Each of these options will incur some costs in terms of time and money which you’ll need to balance against the benefits they offer.
Still Not Sure What Your Best Option Is?
If you’re not certain which option will be best for your business, you need to discuss them with your accountant as soon as possible.
Inca will be pleased to review your situation and recommend your best course of action. Give us a call now for an informal chat!