Since April 2014, certain businesses have been eligible to claim Employment Allowance (EA). If they are eligible, this allows them to reduce their Class 1 NI (National Insurance) by up to £3,000.
Fast-forward 6 years and a change is coming. On the 6th April 2020 the government is changing the eligibility criteria which means not all who currently benefit will continue to do so.
If you want to see the complete criteria of .
The Current Criteria
The current eligibility for Employment Allowance will remain the same until 5th April 2020.
This means businesses can claim a reduction of up to £3,000 in the 19/20 tax year in the amount of Class 1 National Insurance Contributions (NICs) they pay.
Yet, in the current criteria, freelancers and contractors (who pay class 2 & 4 NICs) are not eligible.
Also, you can’t claim the if you:
- Personally use someone for domestic work (e.g. a nanny or gardener)
- Carry out more than 50% of your work in or for the public sector.
There are some exceptions to this though. Exceptions are in instances where you provide services to government or council offices. For example, if you provide security or cleaning services to the aforementioned offices.
It’s reported by the government that close to 450,000 small businesses currently benefit from this scheme. Around a third are paying no employers NI at all.
As you can probably imagine, that is a very expensive scheme. The cost to the treasury is around £2 billion. So, unfortunately, it’s no surprise they want to scale this back.
Changes coming to eligibility from 6th April 2020
Larger businesses will be impacted the most by the changes.
The government estimates that over 99% of micro-businesses and 93% of small businesses will still be eligible for Employment Allowance.
The EA was originally introduced to offer support to business in staff acquisition. However, for larger businesses, the flat rate was never really a major incentive for growth.
So, you can argue that these changes, and the narrowing down of eligibility, will still be enticing to smaller businesses. Whether that plays out or not we will have to wait and see.
Many of these larger employers are looking at a gross annual wage bill of more than c.£850k. Compare that to the low value of EA, the changes target companies who will, in all honesty, consider the relief to be material.
So, what are the key changes you need to know about…
Well, the biggest one is that from 6th April 2020, the Employment Allowance will only apply to smaller businesses.
This means that businesses with an Employer NI bill of £100,000 or more in the previous tax year will not be able to claim the allowance. If it’s higher than that, you’re no longer eligible.
For the 2020/21 tax year, the Employment Allowance is increasing to £4,000 (it was £3,000 in the 2019/20 tax year). Keep in mind the Employment Allowance is a £4,000 allowance per business, not per employee.
You will no longer automatically qualify for EA. You now need to submit a declaration each tax year.
Employers must be able accommodate the £4,000 EA within State Aid limits. If you don’t, you will lose your entitlement to it.
You do not need to include deemed payments when working out their contribution amount. You can’t claim EA for this category of worker, so payments do not count towards the £100,000 limit.
Connected companies must total their Class 1 NIC bills to establish EA eligibility.
- If the total NIC bill for all companies in the group is over £100,000, none of the companies will be eligible for EA.
- If the total NIC bill for all companies in the group is under £100,000, only one of the connected companies will be able to claim EA.
How do I claim the Allowance?
Thankfully this is one thing that hasn’t changed and is still very simple. If your business is eligible this will be subtracted from your Employment NIC liability by your payroll software.
It should hopefully be as simple as putting ‘Yes’ in the ‘Employment Allowance indicator’ field. It’s best to check with your payroll software provider this has been set up correctly if you’re unsure.
What about freelancers and contractors?
Unfortunately, this is still another government policy that continues to overlook freelancers and contractors.
As the self-employed pay Class 2 and Class 4 NICs, they’re not eligible for the Employment Allowance.
What should employers do now?
There’s still time to take the required steps and update your payroll departments and tax agents. Make sure your employees, if impacted, are aware and prepared for the new EA eligibility criteria.
So that means you need to check your secondary Class 1 NIC liabilities. You now also need to add that to any de minimis state aid ceilings and establish how much EA you can claim.