The UK Government first introduced the Employment Allowance (EA) in 2014, which entitled employers to a reduction of up to £2000 from their secondary national insurance liability for the year. In April 2016, the allowance was raised to £3000 with a slight change in rulings which restricted single-director companies from claiming.
In the 2018 budget, it was announced that new restrictions on the EA would be introduced in April 2020 which could affect a significant number of businesses who currently claim. Employers will now only be eligible if their total secondary Class 1 liability in the previous tax year was under £100,000. When determining eligibility to receive the EA going forward, employers who are connected to other employers (such as companies within a group) will need to add together all their collective secondary Class 1 NIC Liabilities in the previous tax year. If this figure is above the £100,000 then none of the employers will be eligible to claim and if it is below the £100,00 collectively then the group must decide which one company will claim.
Several administrative changes are also being introduced which all employers must consider. Whilst the reform aims to ensure the allowance benefits the employers that need it most, some may find the additional admin makes it not cost-effective for them to claim.
One key change is that the EA will have to be claimed every year to receive it – relief will no longer be carried forward from one tax year to the next as it has done. Employers will need to revisit whether they are eligible or not every April and declare this to HMRC.
As a result of restricting the EA to smaller employers, from April 2020, the EA will operate as ‘de minimis state aid’. This will apply to all employers carrying out an economic activity and so governed by state aid regulations. The EA will contribute to the total aid you are allowed to receive under the relevant de minimis state aid cap in the relevant 3-year period. Employers who do not have space in the relevant state aid limit to accommodate the annual amount of the EA will not be eligible, even if they would not use the full annual amount. Every year employers will need to supply HMRC extra information when they claim the EA: the trade sector in which they operate in, the total amount of de minimis state aid they have received or been allocated in the year of the claim and the previous two tax years.
Most businesses will not have received de minimis state aid before so will not need to do further checks to see if they are eligible for the EA however it is important employers understand the new restrictions and rules to ensure they are claiming the EA correctly.
For more information on this topic, please contact Katy Christiansen (email@example.com) or your usual AAB contact.
By Katy Christiansen, Payroll & Employment Tax Senior Manager
For more information on Katy and the Payroll & Employment Tax team, click here.