As of 6th April 2014, the government introduced 'employment allowance', which allows employers to reduce the amount of National Insurance contributions (NIC) they pay for employees by £2,000.
The scheme was introduced to help stimulate the economy, with the aim of allowing small firms to afford more employees. Around 450,000 small companies are cited to benefit from the scheme, with it leading to about one third of those having to pay no NIC at all.
But it can also be exploited for those who operate as self-employed under a limited company. By taking advantage of the scheme you can write off the first £2,000 of NIC, and in instances where an employer's' NIC are less than £2,000, no NIC is due at all for that tax year.
Who can claim?
You can only claim if you pay 'Class 1' Employers NIC, - as is the case with limited company contractors. The self-employed who pay Class 2 and Class 4 are ineligible. Further to that, companies providing services to public sector bodies are also ineligible.
Naturally, it's only worth claiming if your salary is above a certain level. If your salary increases, so too does your banding for income tax and NIC. Ideally you should enlist the assistance of an accountant to process your accounts, and help you set your salary at an ideal level for your personal circumstances.
In case you are processing your own accounts, let's have a quick look at how it breaks down, when also taking corporation tax into consideration. We'll work the example based on a salary of £10,000 for the 2014-15 tax year:
Without claiming on the scheme, if you paid yourself an annual salary of £10,000, £282 would be due in NIC. Taking the company's total wage bill to £10,282. With the current levels of relief for corporation tax, the company would save 20 percent of those expenses, meaning the company makes a total saving of £2,056.
When claiming on the scheme, the initial wage bill is the same but the £282 is deducted as 'employee allowance' before corporation tax relief is applied. This means that you save £282 in NIC as they are well within the £2,000 allowance. The company's wage expenses are now just £10,000, and thus 20% of that amount is saved via corporation tax (£2,000), thus taking the total saving to £2,282 – a difference of £226.