When the Job Retention Scheme (JRS) was launched there were many questions on exactly how it worked and how to carry out the calculations. One of the ongoing queries was the relationship between the Employment Allowance worth up to £4000 to employers and the furlough scheme.
Employment Allowance (EA) allows eligible employers to reduce their annual National Insurance liability by up to £4,000.
Normally you pay less employers’ Class 1 National Insurance each time you run your payroll until the £4,000 has gone or the tax year ends (whichever is sooner).
You can only claim against your employers’ Class 1 National Insurance liability up to a maximum of £4,000 each tax year. You can still claim the allowance if your liability was less than £4,000 a year.
When the JRS calculations were published the guidance was that you could not claim under the scheme if you had an Employment Allowance and had to apply that instead. Whilst this made no cash flow difference at the time, as the claim was less but so were your payments to HMRC, it meant that the EA was being used up as each month went by and for many employers is now gone completely.
The Institute of Chartered Accountants, of which we are members, has been lobbying HMRC for further clarification on this point and we were delighted to hear a few days ago that HMRC have finally confirmed that businesses could, in fact, have saved the EA and used it later in the year against Class 1 National Insurance that is payable after the early part of the furlough scheme ends.
“Where there has been confusion is what happens where the EA does not cover all of the employer’s secondary class 1 NIC liability for the year. Is it permissible for the employer to pay secondary class 1 NIC for the first few months of the tax year starting in April 2020 in the usual way, and make a reclaim under the CJRS instead of using the EA, thus saving the EA for later in the year after the CJRS grant has ceased to be available?
ICAEW’s Tax Faculty has asked several times for HMRC’s guidance to be made explicit on this point and received a definitive answer of yes. The employer is allowed to wait and claim the EA later in the year.
In effect this means that many businesses would be able to reduce what they pay HMRC now that NIC is no longer claimable under the JRS and this could be up to £4000.”
Individual circumstances will determine how much is available now and will depend on how many staff were furloughed as it is only the amount of Class 1 applicable to their salaries that can be adjusted.
HMRC have as yet not issued clear instructions and most payroll software companies have not yet adjusted their software to cope with how to account for these adjustments but our understanding so far is that to regain this position employers will have to:
- Calculate the amount of Employment Allowance that was used to reduce the JRS grant and contact HMRC to claim for an underpayment.
- Amend their EPS submissions to HMRC to remove the use of the Employment Allowance in the earlier part of the year ( this will be dependant on the software being able to do this)
- The employer will receive a further JRS payment but will also have to make a payment to HMRC for the EA now removed from the calculations. At this point the payment to HMRC may be greater than the amount claimed depending on numbers of staff furloughed.
- Reset your payroll software to start claiming the Employment Allowance from August which is when it was no longer claimable from HMRC.
If you run your own payroll we would urge you to revisit your own calculations to make this additional claim.
If you need help, please contact us.