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HMRC internal manual

National Insurance Manual

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HM Revenue & Customs
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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 2016 to 2017 tax year an employer incurs a secondary Class 1 NICs liability totalling £8,000 on their employees’ earnings that tax year. From months 01 to 09 of that year, the employer’s total secondary Class 1 NICs liability is £6,500. The employer claims the Employment Allowance in month 10 and applies the allowance against their secondary Class 1 NICs liabilities arising in months 10 to 12, which total £1,500. The tax year ends and the employer has only been able to use up £1,500 of the £3,000 Employment Allowance available. An unused balance totalling £1500 remains, but as that employer has no other PAYE liabilities owing to HMRC for the 2017 to 2017 tax year, they may claim a refund of that £1500 balance.  
   
Example 2
In the 2016 to 2017 tax year, an employer incurs a secondary Class 1 NICs liability totalling £1,500.  From months 01 to 09 of that tax year, the employer’s total secondary Class 1 NICs liability is £1100. The employer claims the Employment Allowance in month 10 and sets the allowance against their secondary Class 1 NICs liabilities arising in the remaining months 10 to 12, which total £400. The tax year ends and the employer has only been able to use up £400 of the total £1,500 Employment Allowance available. There is an unused balance of the allowance totalling £1,100. As that employer has no other liabilities owing to HMRC at the end of the 2016 to 2017 tax year, they may claim a refund of that £1,100.  
   
Example 3

In the 2016 to 2017 tax year, between months 01 and 09, a single director limited company has no employees other than the sole director. That director’s salary in months 01 to 09 incurs the company a total Secondary Class 1 NICs liability of £1800, however at this stage the company does not qualify to claim the Employment Allowance - (see NIM06545).

The company takes on 3 new employees in Month 10 of the 2016 to 2017 tax year.

  • In months 10 to 12, those 3 employees’ combined earnings incur the company an employer’s secondary class 1 NICs liability totalling £600.
  • In months 10 to 12 the director’s earnings incur the company a £600 secondary class 1 NICs liability
  • The company’s total secondary Class 1 NICs liability for 2016 to 2017 is in the amount of £3000 (£2400 on directors’s earnings and £600 on the other 3 employees earnings).
In this case, for the 2016 to 2017 tax year the company qualifies to claim the Employment Allowance when secondary class 1 NICs liabilities begin to arise on earnings paid which are not the director’s earnings. At that time the company is eligible to claim the full £3000 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 10 onwards, the company was only able to use up £1200 of the £3000 allowance available before the tax year ended. If the employer has no other PAYE liabilities at the end of that tax year to set the £1800 un-used balance against, the employer can claim a refund of that £1800 from HMRC.  
   
Example 4
In the 2016 to 2017 tax year, an employer’s total secondary class 1 NICs liability for that year is £1,000. The employer has therefore used up only £1,000 of the £3,000 Employment Allowance award available to them for that year. They cannot apply the remaining £2,000 unused balance of the allowance, against outstanding secondary class 1 NICs liabilities (then against PAYE liabilities) arising in the 2015 to 2016 or 2017 to 2018 tax years (or any other tax year).  
   

In example 2, the employer’s total secondary class 1 NICs liability incurred during the 2016-17 tax year was below the £3000 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 £3000 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.