From April 2020, the employment allowance (EA) is changing, restricting it to smaller businesses with a National Insurance contributions (NICs) bill of less than £100,000 in the previous tax year.
EA is a valuable relief, particularly for small businesses. It potentially cuts an employer’s NIC payments by allowing them to offset up to a pre-set annual threshold (£3,000 from April 2016, previously £2,000) against their employer NICs liabilities.
Who can claim?
Most employers with a liability to pay employer (secondary) NIC are eligible to claim the EA, including:
- sole traders, partnerships, and companies;
- charities, and those with charitable status such as schools, academies, and universities;
- community amateur sports clubs (CASCs);
- employers of care or support workers.
Who cannot claim?
Certain types of business are ineligible to claim the EA deduction, including:
- personal service companies and managed service companies which are subject to the intermediaries (‘IR35’) legislation. Where there is a deemed payment of employment income, the EA is not available against any employer NICs that arise on the deemed payment. However, the allowance is still available where the company has employees in its own right.
- single director companies. A restriction was introduced from 6 April 2016, which broadly provides that where the only employee paid above the secondary NICs threshold is also a director of the company, the allowance is not available. The restriction can apply in a company which has two or more directors, but where only one of those directors is on the payroll and there are no other employees.
Forthcoming changes
The Autumn Budget 2018 announced details of a further restriction, expected to take effect from April 2020, which aims to target the allowance on businesses that need it most.
From 6 April 2020, access to the EA will be limited to businesses and charities with an employer NICs bill below £100,000.
Currently, some 1.1 million employers claim the EA and the government estimates that around 93% of these will continue to be eligible once the restriction takes effect, with many paying no employer NICs at all.
Claiming the EA
EA is generally delivered by the employer through standard payroll software and HMRC’s real-time information system. However, it isn’t given automatically and must be claimed. Claiming is very straightforward; the employer simply signifies his intention to claim by completing the ‘yes/no’ indicator just once. Although ideally the claim should be made at the start of the tax year, it can be made at any time in the year.
The employer will then offset the allowance against each monthly Class 1 secondary NICs payment that is due to be made to HMRC, until the allowance is fully claimed or the tax year ends.
For example, if employer Class 1 NICs are £1,200 each month, in April the employment allowance used will be £1,200, for May it will be £1,200, and for June £600, as the maximum is capped at £3,000.
The EA applies per employer, regardless of how many PAYE schemes that employer chooses to operate, so each employer can only claim for one allowance. It is up to the employer which PAYE scheme to claim it against.
It is worthwhile checking that the EA has been utilised where possible. If a claim is made too late in a tax year to set the whole allowance against the employers’ NIC liability, the employer may apply to HMRC for a refund.
Practical tip:
For most businesses, it will be clear whether they will be affected by the forthcoming restriction on the EA. However, for those on the cusp of £100,000 in 2019/20 the timing of (say) bonuses in that year could determine entitlement in the payroll for April 2020.
