Sarah Laing highlights three changes to the employment allowance (EA) of which employers need to be aware.
The employment allowance (EA) is a valuable relief, which currently benefits more than a million smaller businesses in the UK. Broadly, the relief works by allowing an employer to offset up to a pre-set annual threshold against their employer National Insurance contributions (NICs) liabilities.
The allowance is claimed as part of the normal payroll process through real time information (RTI). Employers may generally claim the allowance if they are either a charity or a business (including a community amateur sports club) that pays employers’ Class 1 NICs on employees’ or directors’ earnings and is not funded by central government. This means that an academy, although funded by central government, qualifies for EA because it is a statutory charity.
There are however, certain types of business that remain ineligible to claim the EA deduction, including:
- Personal service companies (PSCs) and managed service companies (MSCs) which are subject to the intermediaries’ legislation (IR35).
- Single director companies. A restriction applies (from 6 April 2016) that where the only employee paid above the secondary NICs threshold is also a director of the company, the allowance is not available.
Recent changes
Three changes apply from April 2020.
Maximum claim limit
Since 6 April 2014, eligible employers have been able to reduce their employer Class 1 NICs liability, initially by up to £2,000 per tax year, from 6 April 2016 by up to £3,000 per tax year.
It was announced in Budget 2020 that this maximum would rise to £4,000 from April 2020. This change has now been enacted by statutory instrument (SI 2020/273).
Restriction of EA
The second change that applies from 6 April 2020 is designed to refocus the allowance on the smaller businesses that it was originally designed to help. From that date, employers with a secondary (employer’s) Class 1 NICs liability of £100,000 or more in the preceding tax year will no longer be eligible to claim the allowance. In assessing whether the £100,000 limit has been reached, the total liability of all ‘connected’ employers must be added together. If the total exceeds £100,000, none of the connected employers will be eligible to claim.
It is also worth noting that where employers become connected during a tax year causing the total collective secondary Class 1 NICs liability to exceed £100,000 in that year, they can continue claiming EA for the remainder of that tax year, but will cease to be eligible from the start of the following tax year.
State aid
Also applying from 6 April 2020, the EA is operated as de minimis State aid. Broadly, this means that employers already in receipt of State aid need to check that they have sufficient headroom to include the EA within their relevant de minimis limit, which is calculated in Euros over a three-year period (the current tax year plus the previous two tax years) and will depend on the economic trade sector in which the employer operates, namely:
- Primary production of agriculture products – €20,000 ceiling;
- Fisheries and aquaculture sector - €30,000 ceiling;
- Road freight transport sector - €100,000 ceiling;
- Other, industrial - €200,000 ceiling.
Employers operating in more than one sector must ensure that the limits in respect of each relevant sector have not been exceeded. It is only possible to claim in respect of employees within a specific sector until that sector limit is reached. If there is insufficient headroom to claim the full EA (even if the employer may not have used the full amount) they will not be eligible to claim.
Practical tip
Employers should check their NICs bills carefully. The increase in the EA maximum to £4,000 from 6 April 2020 is particularly valuable to small, growing enterprises, which may be able to take on staff without incurring additional NICs liabilities.
