From 6 April 2016 one-man companies will cease to qualify for the employment allowance (EA). Adding your spouse to the payroll has been suggested as a way around this. Is it that simple?

Employment allowance

The employment allowance (EA) is a credit that employers can claim against their NI bill. Your payroll software will work out and deduct the EA where you indicate that you’re entitled to it. From 6 April 2016, it increases from £2,000 to £3,000, but new rules mean that companies, where the only employee is a director, will lose entitlement.

If you are the sole director/employee of a small business, paying yourself a minimum directors salary of £10,600 in 2014/15 – then you would have recovered (or simply not paid) £343 in Employers National Insurance (NI). In 2016/17 – you will have to pay the Employers NI over to HMRC, which will cost you £398.

 

  2015/16      2016/17
Typical Directors salary £10,600.00   £11,000.00
Ni threshold (£156 * 52) £8,112.00   £8,112.00
Salary on which NI is charged £2,488.00   £2,888.00
Rate 13.8% 13.8%
Per Year £343.34   £398.54
Per Month £28.61   £33.21
Employers Allowance (£343.34)   £0.00
Corporation Tax Saved   £0.00  (£79.71)
Net ‘cost’ to business £0.00 £318.84

 

The good news for 2016/17 is that this is tax deductible so, the £398 charge will reduce your corporation tax by 20% – £79.71. The overall additional cost to your business is £318.84.

Work around

Very quickly the tax experts spotted what seemed to be a simple way around the new rule: add your spouse or partner to the payroll and pay them a token salary of, say, £10 per month. Almost as quickly sceptics said this wouldn’t work because HMRC’s anti-avoidance rules would prevent it.

Actually, we DON’T recommend a nominal salary of very little meaning – with many of our clients, we find that the spouse actually does provide a value adding contribution to the business, whether it be proof reading blogs, brainstorming ideas, answering phones or running to the bank. Some do admin and bookkeeping and others provide marketing or creative services but don’t consider them significant and don’t charge for them. Some of our clients (including us) have college age children capable of providing social media account management and business admin services. Again, if these are routine tasks, they can be put on payroll.

Who’s right?

According to the Treasury statement made on 1 March 2016 the sceptics are nearer to the correct answer. HMRC added to the argument in its Employer Bulletin published in February 2016. It says “We will keep you informed through the Employer Bulletin on what you need to do to make sure your company complies with this change” . Reading between the lines we’re expecting some last minute announcements that will tighten the new rules.

EA no problem

In view of the HMRC and Treasury statements, if you’re planning to put your spouse or partner on the payroll of your one-man company for the first time in 2016/17;

  • have them carry out work for the company and,
  • pay them above the NI primary threshold of £156 per week.

Keep proper records, timesheets, task lists or a simple job description to evidence the work being done by your spouse.

Proceed with caution

To avoid trouble with HMRC we recommend not claiming the EA in 2016/17 unless you can’t meet both the conditions mentioned above, or hold off until the Treasury and HMRC clarify the position. We’ll keep you informed about any announcements.

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