Many small to medium sized companies have made use of the £4,000 employer allowance (EA) rebate so far this tax year. However, with the somewhat uncertain times companies are facing at the moment, the number of redundancies made has unfortunately seen a significant increase.
A change in the EA rules for 2020-21 saw companies having to apply for the EA for the first time since the scheme was introduced in April 2014. Sole traders, limited companies and/or partnerships could all apply. The EA applied to limited companies that employ staff who are not directors. It also applied to limited companies that only employ directors as long as there were two or more directors earning above the Secondary Threshold for National Insurance.
The EA is not available to businesses deemed as single person limited companies. Nor is it available to sole traders with no employees, or whose staff are employed on a household basis only, such as gardeners or chauffeurs etc.
The EA is a refund of the first £4,000 a company pays in employer NI contributions. It is claimed by reducing the PAYE liability returns made to HMRC. The deductions take place on a monthly or quarterly basis until such time as the £4,000 is exhausted, or the company no longer qualifies for the scheme. If a company no longer qualifies for the scheme, any claims made against the allowance for that tax year has to be paid back.
So, if you are making all your staff redundant, bear in mind that any EA you have claimed will have to be paid back, as no employees mean you no longer qualify for the EA. If you can, maintain at least one employee who earns above the secondary threshold, this way no repayment amount can be charged.