NIM06585 - Employment Allowance: Employer unable to use up all of the Employment Allowance against their total secondary class 1 NICs liabilities before the tax year ends

National Insurance Contributions Act 2014 - Section 4, subsections (5) to (10)

What if an employer cannot use up all of the Employment Allowance before the tax year ends?

• Setting off the Employment Allowance against other outstanding liabilities

From the 2014 to 2015 tax year onwards, an employer may claim the Employment Allowance against their secondary class 1 NICs liabilities. The maximum award an employer may receive during a tax year is the lesser amount between their total secondary class 1 NICs liabilities arising over the whole of the tax year and the annual amount of the Employment Allowance for that tax year.

If, in a tax year, an employer incurs secondary class 1 NICs liabilities equal to or exceeding the annual amount of Employment Allowance available that year, but they are unable to use up the full annual amount of the allowance before that tax year ends, (for example, the employer claims the allowance late in the tax year) then any remaining balance of the allowance not used up may be set against any PAYE liabilities the employer owes HMRC for that same tax year.

• Refunds of the Employment Allowance

If, in a tax year, an employer incurs secondary class 1 NICs liabilities equal to, or exceeding that year’s annual amount of the Employment Allowance, but before that year ended they had been unable to use up the full amount of the allowance against their secondary class 1 NICs liabilities and afterwards, their other PAYE liabilites, then they may apply to HMRC for a refund of the unused balance of the Employment Allowance.

Example 1

In the 2021 to 2022 tax year, an employer incurs a secondary Class 1 NICs liability totalling £8,000 on their employees earnings for that year. From months one to nine of that year, the employer’s total secondary Class 1 NICs laibility is £6500.The employer claims the Employment Allowance in month ten and applies the allowance against their secondary class 1 NICs liabilites arising in months ten to twelve, which total £1,500. The tax year comes to an end and the employer has only been able to use £1,500 of the £4,000 allowance. An unused balance of £2,500 remains, but as the employer has no other PAYE liabilities owing to HMRC for the 2021 to 2022 tax year, they may claim a refund of the £2,500 balance.

Example 2

In the 2021 to 2022 tax year, an employer incurs a secondary Class 1 NICs liability totalling £4,000. From months one to nine of that tax year, the employer’s total secondary class 1 NICs liability is £3,000. The employer claims the Employment Allowance in month ten and sets the allowance against their secondary Class 1 NICs liabilities arising in the remaining months ten to twelve, which total £1000. The tax year ends and the employer has only been able to use £1,000 of the £4,000 Employment Allowance available. There is unused balance of the allowance totalling £3,000. As the employer has no other liabilities owing to HMRC at the end of the 2021 to 2022 tax year, they may claim a refund of that £3,000.

Example 3

In the 2021 to 2022 tax year, between months one and nine, a single director limited company has no employees other than the sole director. That director’s salary in months one to nine incurs the company a total Secondary Class 1 NICs liability of £2,400, however, at that stage, the company does not qualify to claim the Employment Allowance - (See NIM06545).

The company takes on 3 new employees in month ten of the 2021 to 2022 tax year.

In months ten to twelve:

• those 3 employees’ combined earnings incur the company an employer’s secondary class 1 NICs liability totalling £800.
• the director’s earnings incur the company a £800 secondary class 1 NICs liability

The company’s total secondary Class 1 NICs liability for 2021 to 2022 is in the amount of £4,000 (£3,200 on director’s earnings and £800 on the other 3 employees earnings).

In this case, for the 2021 to 2022 tax year, the company qualifies for the Employment Allowance when secondary class NICs liabilities begin to arise on earnings paid which are not the director’s earnings. At the time, the company is eligible to claim the full £4,000 amount of the Employment Allowance for that tax year, but as the allowance began to be applied against the secondary class 1 NICs liabilities from month ten onwards, the company was only able to use £1,600 of the £4,000 allowance available before the tax year ended. If the employer has no other PAYE liabilities at the end of the tax year to set the unused £2400 balance against, the employer can be claim a refund of the £2,400 from HMRC.

Example 4

In the 2021 to 2022 tax year, an employer’s total secondary class 1 NICs liability for that year is £1,000. The employer has therefore only used up £1,000 of the £4,000 Employment Allowance award available to them for that year. They cannot apply the remaining £3,000 unused balance of the allowance against secondary Class 1 NICs liabilites (then against PAYE liabilities) arising in the 2020 to 2021 or 2022 to 2023 tax years (or any other tax year).

In example 2, the employer’s total secondary class 1 NICs liability incurred during the 2021-22 tax year was below the £4,000 annual amount of the Employment Allowance for that year. Therefore, that employer could only receive the benefit of that allowance up to the value of their total secondary class 1 NICs liability incurred, they are not entitled to receive the full £4,000 allowance if their secondary class 1 NICs liability were below that amount.

The set-off and refund procedures explained above are the only ways in which an employer may benefit from an unused amount of the Employment Allowance. There is no legislative provision that enables an employer to use up an unused amount of the Employment Allowance against employers secondary class 1 NICs (then PAYE liabilities) arising in earlier (or later) tax years.

Time limit for refunds of the Employment Allowance - section 4 subsection (8)

There is a four year time limit for claiming Employment Allowance refunds, which starts immediately after the end of each tax year for which an unused amount of the allowance exists. No claims can be made for the Employment Allowance for tax years prior to the 2014 to 2015 tax year.

Repayment interest on refunds of the Employment Allowance

HMRC will pay repayment interest on any refund of the Employment Allowance. The interest will be paid from the National Insurance Fund (or the Northern Ireland National Insurance Fund) and in accordance with the application of section 102 of the Finance Act 2009, that interest will accrue from the date on which HMRC receive the Employment Allowance repayment claim, up until the date HMRC issue any resulting repayment.

Connected companies/charities

Where there is a group of connected companies or charities, the Employment Allowance can only be claimed by one of those companies/charities and must be claimed against one nominated PAYE scheme only (see NIM06630). Where this applies, if that nominated PAYE scheme is unable to use up the full annual amount of the Employment Allowance in a tax year, then any remaining balance cannot be transferred to be set against another PAYE scheme operated by that same (or another) company/charity.