Sudden emergence of PAYE credit notices

Recently, there has been an emergence of PAYE credit notices, typically for around £3000, which has left many people confused about their origin. Well, the solution to this conundrum has been uncovered.

In April 2014, the Employment Allowance (EA) was introduced as a means to reduce employment costs for small businesses. Initially, companies that had only one employee who was also a company director were permitted to claim this allowance to offset their employers’ National Insurance Contributions (NIC) liability. In the first year, the maximum allowance that could be offset was £2000. Over time, this amount gradually increased and reached £5000 by the 2023-24 tax year.

Initially, companies eligible for the EA had to submit an Employment Payment Summary (EPS) in the first pay period in which they claimed the allowance. This EPS served as a notification to HMRC of their eligibility, and it remained in effect until further notice. However, it was this open-ended phrasing that caused issues later.

In April 2016, HMRC changed the rules so that companies could no longer claim the Employment Allowance if the only person earning above the employer’s NI threshold was also a director of the company. When this rule was modified, HMRC specified that employers who were no longer eligible needed to submit another EPS in April 2016 to “un-claim” the Employment Allowance. Unfortunately, many companies and payroll bureaux failed to send the EPS despite ceasing to claim or deduct the Employment Allowance in their payroll.

As a result, HMRC continued to apply credits to the PAYE account each year, while the company paid the full amounts without deducting the EA. Consequently, the PAYE accounts appeared as overpaid.

The solution – If this has happened to your company or a company you are dealing with, then you need to submit an Earlier Year Update (EYU) through HMRC Basic Tools to “unclaim” the EA for the affected years.

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