Tax and National Insurance

The main deductions from wages for individuals working in the UK are income tax on their earnings, which helps pay for services like education and healthcare, and National Insurance which helps pay for some benefits and the State Pension.

Tax
National Insurance
National Insurance for those aged under 21 years old and apprentices under 25
Employing your spouse or close relative – treatment
£3,000 National Insurance allowance for employers

          Who can claim?
          How does it work?
          How do employers claim it?
          Can I claim the £3,000 allowance after the tax year has started?
          Where can I find more information?

Tax

A person can normally earn a certain amount of money each year, without paying any income tax. This tax-free amount is called the ‘Personal Allowance’. A person pays income tax on anything above this amount. The more a person earns, the higher the amount of income tax they pay. 

You can see the key rates of income tax and personal allowances on GOV.UK here. Please note that from 6 April 2016, the Scottish rate of income tax (SRIT) is in force, however at the moment it is set at a rate which means a Scottish taxpayer pays the same tax as someone from the rest of the UK. The SRIT also does not affect the personal allowance.

Where a person is employed, the employer will deduct tax from their wages and pay it to HMRC under the PAYE system (Pay As You Earn). PAYE spreads an employee’s tax bill over the tax year, rather than paying in one lump sum.

We explain more about the way the PAYE system works here.

Back to top

National Insurance

If you employ a personal assistant, as well as collecting and sending the right amount of tax to HMRC, you will also need to collect and send National Insurance contributions (NIC) to HMRC.

NICs are paid to build up entitlement to certain state benefits, including the State Pension. You can find out more about who pays National Insurance on the GOV.UK website.

Contributions are based on a percentage of earnings. Both employees and employers usually make payments. NIC payments made by employees are called primary Class 1 contributions and those made by employers are called secondary Class 1 contributions. 

For 2016/17, employees do not pay NIC on pay up to the threshold of £155 per week. However between £112 per week and this threshold, employees will receive credits on their National Insurance record which help protect entitlement to the state pension and other benefits.

This is one of the reasons why employers are always required to record and report information about employees who earn at least £112 per week under the PAYE system, even if no money actually needs to be sent to HMRC – so that HMRC can see that they need to put NIC credits on the employee’s record.

For 2016/17, employers pay NIC on any employee’s pay over £156 per week. You can see the key rates of NIC here.

It is important to note that unlike tax, which is calculated cumulatively (i.e. by looking what has happened in the tax year so far), National Insurance is calculated by looking at employee’s earnings, whether paid weekly or monthly, in isolation.

Example:

Jenny has two part time jobs. They both pay her £250 a week. Jenny’s tax free personal allowance (weekly amount of £211.53) is allocated against her first job through the payroll, 20% tax is deducted on every pound from her second job in accordance with code BR. Her weekly tax deductions in 2016/17 are therefore: Job 1: £7.69 (£250 - £211.53 = £38.47 x 20%), Job 2: £50.

At the end of the tax year, we can see that Jenny has paid more or less the right amount of tax, taking into account that her tax free personal allowance for the year is £11,000.

Income from first job

£13,000

Income from second job

£13,000

Total income

£26,000

Less personal allowance

(£11,000)

Balance subject to 20% tax

£15,000

Tax due

£3,000


The tax collected through the payroll for job 1 is £7.69 x 52 = £399.88

The tax collected through the payroll for job 2 is £50 x 52 = £2,600

Total collected = £2,999.88.

For NIC purposes, in both her jobs, she will pay £11.40 a week, so a total of £22.80 per week and an amount of £1,185.60 annually. The weekly amount is calculated as £250 - £155 = £95 x 12% = £11.40. The fact she is working two jobs is not taken into consideration for NIC like it is for tax. Her NIC liabilities for her two jobs are calculated totally independently from each other and are not compared to an overall annual amount, like for tax.

Back to top

National Insurance for those aged under 21 years old apprentices under 25

Employers with employees under 21 years old do not have to pay Class 1 secondary contributions (i.e. the employers contribution), providing the earnings are less than £43,000 per annum (£827 per week).

The employee will continue to pay National insurance at the usual rates – so this is a benefit only to the employer.

Full details of the scheme can be found on the GOV.UK website.

A similar provision applies to apprentices under 25. Full details of the scheme can be found on the GOV.UK website.

Back to top

Employing your spouse or close relative – treatment

It is important that you are aware that there are no special tax rules that apply to employing members of your family. The same tax rules apply to family members as they do to any other employees.

However, for NIC purposes if you employ someone you usually live with in the same ‘dwelling house’ then this will be disregarded and no NIC will be payable. You can find confirmation of this in HMRC's National Insurance guidance. However, on the basis that you cannot normally use Direct Payments to pay a relative who lives with you, this will only be relevant in very exceptional circumstances or perhaps if you are self-funding your personal assistant.

There are also special rules for family members and National Minimum Wage. You can find out more on GOV.UK website.

Back to top

£3,000 National Insurance allowance for employers

In 2016/17, you could get up to £3,000 a year off your National Insurance bill if you’re a care and support employer.

Background

In April 2014, the government introduced an employment allowance (originally £2,000 per year) for employers to offset against their employer NIC liability. This was not initially open to care and support employers.

From April 2015, the scheme was extended to cover individuals employing certain care and support workers. This was something that LITRG had campaigned for and you can read our Press Release welcoming the announcement here. (If you claimed the allowance in error for 2014/15 and HMRC ask you to pay it back, then please let us know – how HMRC deal with any care and support employers is clearly of interest and concern to LITRG.)

Employers of other domestic staff (such as chauffeurs, gardeners, nannies) are still excluded from having the allowance because the government’s aim for the allowance is to support businesses aspiring to grow by hiring their first employee or expanding their workforce. It is therefore aimed at commercial enterprise, rather than personal domestic service.

Who can claim?

If an employer is paying an employee who is a care and support worker more than £156 per week in 2016/17 (and so is liable for employers NIC 13.8% on the excess of the weekly pay over this threshold), they could be entitled to the Employment Allowance, provided:

  1. The employee is caring for either the employer or a friend or relative of the employer;
  2. The individual needs care because of their old age, mental or physical disability, past or present dependence on alcohol or drugs, past or present illness, or past or present mental disorder;
  3. The employee’s duties of the employment relate wholly to providing the care to the individual who needs it.

It is irrelevant whether the employer funds the cost of employing a personal assistant from their NHS or local authority payments or whether it is from personal resources.

How does it work?

The allowance is given as a credit to reduce the employer’s National Insurance contributions actually payable, up to a maximum of £3,000 over the whole tax year. This means a care and support employer could pay their carer, or carers anything up to about £574 per week in total in 2016/17 (around £29,848 per annum), and will have no employers NIC to pay as the liability comes under the £3,000 allowance. By comparison an employee paid £600 a week in 2016/17 will generate an employer’s NIC liability of £3,193.32. Under the Employment Allowance, the first £3,000 can be deducted, leaving £193.32 payable for the tax year.

Note that any employer’s NIC above £3,000 will only be paid once the Employment Allowance has been exhausted, so in the example above you would pay no employer’s NIC for the first 11 months of the tax year and £193.32 in the twelfth month.

How do employers claim it?

If you file HMRC returns on-line: the Employment Allowance is claimed on an Employment Payment Summary (EPS). You simply tick the box in your payroll software which confirms you are eligible and the Employment Allowance will be applied automatically to reduce your Employer NICs bill. 

If you use HMRC’s Basic PAYE Tools (BPT) software, then you will find the box to tick in the Employer details section – select ‘Change employer details’. 

You should be aware that you must send in an EPS to tell HMRC that the allowance is being claimed. If you simply do things as usual, but reduce the amount that you pay to HMRC by the allowance, this will flag as an underpayment on their systems and it is likely you will be contacted by HMRC. Please also note you only need to tick the relevant box one to make HMRC aware you are claiming the Employment Allowance – this will then apply it on an ongoing basis. You should not untick the box when the Employment Allowance has been fully used.

You file your HMRC returns on paper: tick the box which asks whether the Employment Allowance is to be claimed on page 2 of the form RT5 every time a form RT5 is submitted. Your first RT5 for 2016/17 will be due by 19 July 2016. You need to remember to subtract the value of the allowance from your Employer NIC liability before you make an actual payment to HMRC.

Can I claim the £3,000 allowance after the tax year has started?

Yes. If claiming it late, means that you will not have used the maximum amount of Employment Allowance allowable, HMRC will offset the balance against another PAYE liability or refund you, so the allowance is not lost.

Example: 

You pay your personal assistant £574 per week, however you only realise in week 10 that you can claim the Employment Allowance, rather than doing so from week 1. The Employment Allowance will therefore be applied from week 10 – it cannot be backdated to week 1. This means that although you will not pay any Employer’s NIC from week 10 onwards, you will have paid £57.68 NIC in weeks 1 to 9 that strictly you did not need to. At the end of the tax year HMRC will therefore give you a credit for £519.12 (£57.68 x 9) to use against other PAYE liabilities (or will refund you the amount if you have nothing to use it against). 

Where can I find more information?

  • The basic Government guidance on Employment Allowance can be found here.
  • Detailed guidance on care and support worker eligibility for the Employment Allowance and how to claim is available here.
  • The BPT 2016/17 User Guide is available here.
  • Step-by-step help for employers whose commercial software does not have the facility to send an EPS (you will have to use HMRC’s Basic PAYE Tools to make the claim).

Back to top