Contractors' Questions: Are contractors eligible for Small Employers’ Relief?
Contractor’s Question: Are contractors who run their own limited company entitled to or eligible for Small Employers’ Relief?
Expert’s Answer: Small Employers’ Relief (SER) is often an overlooked relief by many companies. So it is indeed worth knowing that if you are a contractor using a Personal Service Company (PSC), whether you are eligible for Small Employer’s Relief.
So what is Small Employers’ Relief (SER)?
SER is applicable if employers pay Statutory Maternity Pay (SMP), Statutory Paternity Pay (SPP), Statutory Adoption Pay (SAP), or Shared Parental Pay (ShPP).
It is important to note that employers can only claim the above statutory benefits and can no longer claim Statutory Sick Pay (SSP) from HMRC.
What does HMRC class as a ‘small employer’?
From tax year 2013-14 onwards, HMRC classifies you as a small employer, if you paid £45,000 or less in National Insurance Contributions before the deduction of Employment Allowance in the previous tax year.
Are contractors eligible for small employer’s relief?
The answer is ‘Yes.’ If you are working through a PSC, you are classed as an employee and provided you qualify for the statutory payments, you will be eligible for the Small Employers’ Relief.
What can you claim?
If you are eligible as a small employer, then you can recover an additional 11% of any SMP, SPP, SAP or ShPP that the employer has paid to the employee.
This means in total, small companies can claim back 100% of the value of statutory payments made as ‘Recovery’ and a further 3% of the value as ‘Compensation.’ This rate has dropped from the previous level of 4.5% applicable to payments before April 2011.
If the total gross NIC bill from the previous tax year was greater than £45,000, HMRC would class you as a medium or large company and you cannot apply for SER. However, medium or large employers can still reclaim 92% of the value of statutory payments made as ‘Recovery’ only but cannot claim anything as ‘Compensation.’
SER eligibility example for contractors
If you are eligible, then here’s an example of what you can recover:
Consider an employer who paid Class 1 National Insurance Contributions for tax year 2019/20 of £5,500.
This will be the deemed qualifying tax year for statutory payments made to relevant employees in the tax year 2020/21.
The employer is eligible for the Small Employer Relief scheme as they are comfortably within the threshold of £45,000 and the amount that can be recovered for statutory payments is calculated as follows:
Gross Class 1 National Insurance Contributions for the tax year 2020/21 - £6,000
Statutory payments made - £1,500
Amount to be recovered = 103% x £1,500 = £1,545
(100% of the statutory payments plus 3% compensation)
Net NIC liability payable to HMRC = £4,455.
Be aware, the amount that needs reclaiming needs to be included in the ‘employer payment summary.’
Further consider, if the amount of statutory payments exceeds the total tax and NIC payable for the period, then the employer can apply for advanced funding (up to 4 weeks before), in order to make payments to HMRC.
Example: The employer has £4,000 in PAYE liability pay and £4,500 to reclaim in statutory payments. The employer can apply for an advance payment of £500.
How does SER work with the NI Employment Allowance?
You don’t ask about but it’s worth noting that you can only claim the once-popular National Insurance Employment Allowance if you have additional employees, other than yourself. Sole director companies without other employees are not eligible to claim the Employment Allowance.
If you are an employer that is eligible for Employment Allowance, then you may be eligible to offset up to £4,000 off your Employer National Insurance bill for the year, using the Employment Allowance.
If you are classed as a 'small employer' you could also qualify for Small Employers’ Relief which means that you can reclaim 103% of any SMP, SPP, SAP or ShPP that you pay to your employees.
N.B. Small Employers’ Relief can be claimed irrespective of you qualifying for EA.
Is SER applicable when running a Personal Service Company?
PSCs qualify as ‘small employers’ and therefore it is more valuable for them than medium-sized or larger employers. Umbrella companies will mostly not qualify as they would typically have Class 1 NIC in excess of £45,000.
So if you are operating a PSC, and are eligible for any of the statutory payments mentioned, then you will be eligible to claim Small Employers’ Relief. However, it is always worth checking with your accountant in case the rules change.
The expert was Siddharth Agarwal, tax manager at DNS Accountants.