Since April 2014, the Employment Allowance (EA) has entitled employers to up to £3,000 off their annual secondary Class 1 NIC bill. However, from April 2020, a new restriction on the EA is to be introduced. This means that employers will now only be eligible for the EA if their total secondary Class 1 liability in the previous tax year was under £100,000.
There are also a number of administrative changes to be introduced, including the fact that EA must now be claimed every year instead of running on from one tax year to the next automatically.
The reason for these changes is predominantly that employment allowance is now to be considered a type of State Aid, which could give some businesses an unfair advantage over others within the European Union, affecting trade negatively.
What Do These Changes Mean?
Put in simple terms, these changes effectively prevent any medium to large companies from claiming employment allowance. More than 100,000 employers are thought to be affected. For smaller companies there is more of a chance that they will still be able to claim, with experts predicting that more than 99% of micro-businesses, and 93% of small businesses are still eligible.
You cannot claim employment allowance if:
- You are the director and the only employee that is paid above the secondary threshold
- You employ someone to work for you in your home, doing domestic or personal work. This does not include care or support workers.
- Your business does more than half its work in the public sector (unless you are a charity)
- You are a service company working under IR35, with your income being only the earnings of the intermediary.
What Should You Do?
Whatever your business status, there will be some things that you need to do if you want to keep employment allowance, or to adjust to the changes. If you are still entitled to EA, then you need to make sure that you make a new claim every tax year.
Before You Make A New Claim
You need to double check whether or not you are still eligible to claim EA, before you can claim through your Employer Payment Summary (EPS) as before. Once you have claimed, your claim will not renew automatically, and you will need to remember to apply again every year.
Check Your Eligibility
From 6 April 2020 you will only be able to claim EA if your total (secondary) Class 1 National Insurance contributions liability is less than £100,000 in the tax year before the year of claim.
You won’t need to include deemed payments (such as to contractors and other off-payroll workers) in your calculations, as the payments don’t count towards your secondary Class 1 NICs total and you cannot claim EA for these employees.
If You Have More Than One Payroll
If you run more than one payroll then you need to add together the employers secondary Class 1 NICs liabilities for each payroll.
If the total amount is:
- £100,000 or more: you are not eligible to claim employment allowance
- Less than £100,000: you should decide which payroll you want to use to make your claim
For connected companies you should add together the total amount of employers secondary Class 1 NICs liabilities for all companies within the group.
If the total is:
- £100,000 or more: none of the companies are eligible to claim employment allowance
- Less than £100,000: the group must decide which company will claim
De Minimis State Aid
One of the reasons for the changes to employment allowance is that the allowance has been reclassified as de minimis state aid as of April 2020.
De minimis state aid refers to an approved EU process wherein small amounts of aid (less than €200,000 over 3 consecutive tax years) can be given by the state to a company, in the interests of boosting the economy without distorting market competition.
For businesses who are eligible for employment allowance, whose NICs are below £100,000 across all connected companies, it is first necessary to look at the minimis state aid they have received to ensure that they haven’t breached the upper limit of the cap placed on their sector.
Businesses Covering Two Or More Sectors
For businesses that cover two or more sectors then this may be even more complicated, as they need to ensure that they have enough space under all of their sector ceilings if they want to get the full amount of employment allowance available.
- Only claim employment allowance against the liabilities of an employee working in a certain sector until that sector ceiling has been met
- Continue to claim the employment allowance against the liabilities of an employee working in another sector, as long as that business sector still has space under its ceiling
It is possible that a business will work between two or more sectors, but only has space under the ceiling of one sector in order to receive minimis state aid. If they do not have any employer secondary NICs liabilities in that sector, then although they are technically eligible for EA, there are no liabilities to set the claim against and a claim cannot be made.
Claim And Declaration For 2020/21
In order for businesses to qualify and apply for EA for 2020/21, they will need to fill out a claim and declaration that states to HMRC that:
- The total of NICs paid by them and any connected businesses in 2019/20 was less than £100,000
- The total EU state aid received in 2020/21 and the previous two tax years will not exceed the limit for their trade sector if employment allowance is applied
- They are the only company in their group (of connected companies) claiming EA
Businesses will usually be notified in writing of any state aid that they have received, allowing them to state this in their claim. However, it is important that all of this is checked and confirmed before making a claim as penalties may be applied if the figure is wrong or a claim is made incorrectly.
Luckily changes to the Employment Allowance will not affect the vast majority of micro companies, who have come to really value the savings it makes in their employment related spending
The team at TFMC are experts at identifying tax saving opportunities for UK companies large and small. To see if we can help your business then why not contact us on 0800 470 4820 or via email at firstname.lastname@example.org.