Employment allowance and April 2020 Changes

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?

• Sole traders, partnerships, and limited 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: PSC andand 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 if the company has employees in its own right.
• A Single Director: 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.
• Connected companies: If a group has more than 1 employer PAYE reference, the EA claim only apply to one company (the one with higher labour cost).

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 a year.

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.

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.