The new employment allowance rules

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.

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.

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.

Tip. 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.

The government and HMRC say that the rules prevent entitlement to the EA unless you pay your spouse at least £156 per week and they work to justify their pay. If these conditions are met then you’re safe to claim it.