ACCA Advanced Taxation (ATX) Practice Exam

Which statement is true regarding the Employment Allowance?

1. It applies to both employers and employees.

2. It can be utilized by all companies regardless of payroll amounts.

3. Only the employer can reduce their Class 1 secondary NIC.

4. It is applicable for companies with a sole director as the only employee.

The correct answer is: Only the employer can reduce their Class 1 secondary NIC.

The Employment Allowance is designed specifically to reduce the amount of Class 1 secondary National Insurance contributions (NICs) that employers are required to pay. Therefore, the statement that only the employer can reduce their Class 1 secondary NIC is accurate. The allowance allows eligible employers, including businesses and charities, to claim a reduction in their secondary NIC liability, thus benefiting them directly. This mechanism promotes employment by reducing costs associated with hiring employees, but it is strictly an employer-focused relief. In particular scenarios such as when a company has only one director who is also the only employee, the allowance can still be claimed, but it is the company (as the employer) that receives the reduction. The allowance does not provide any direct benefits to employees, nor is it available for personal tax reductions or benefits for the employee side of NICs. When considering the other statements: the Employment Allowance is not applicable to all companies indiscriminately, as there are eligibility criteria that must be met. Additionally, the allowance only provides financial relief to the employer and does not offer any reductions that can be passed down to employees or enjoyed by them directly.