From 6th April 2014, businesses are entitled to reduce their employer’s National Insurance bill by up to £2,000 per year. This allowance applies to the majority of businesses, including limited companies run by contractors and freelancers – however the benefits may be limited.
The benefit of this £2,000 allowance is limited for low-salary employees
If you’re currently paying yourself a low salary combined with dividend payments, you may not benefit fully from this £2,000 allowance.
This is because it’s unlikely that you’re currently paying a large amount of National Insurance, and increasing your salary to take advantage of this allowance is a fruitless exercise. That’s because the £2,000 can only be claimed against Employer’s National Insurance contribution – not the Employee’s contribution.
By increasing your salary you increase both the amount of Employer’s and Employees National Insurance due. This means to attempt to recoup the £2,000 employer’s allowance you’d need to increase you salary to over £22,000. In doing so, you personally would have to pay over £1,700 in employee’s National Insurance.
The position for contractors inside IR35 is not clear
There is still widespread uncertainty about the implications of contractors who operate inside IR35. Our current recommendation is not to attempt to claim this allowance until HMRC have provided further guidance.
Contractors who use an umbrella company won’t benefit from the £2,000 allowance
The National Insurance allowance is per employer, not employee. Given that Umbrella Companies are by their very nature just large employment vehicles, they can only claim £2,000 per year for all of the contractors on their books. Therefore umbrella company clients will not see any benefit from this allowance.