Who should claim the employment allowance?

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This is worth up to £3,000 per year to set against an employer’s Class 1 NIC bill, but some employers don’t know whether they can claim the employment allowance.

Purpose

The employment allowance was introduced in April 2014 to incentivise recruitment in general but especially for smaller employers, who are most likely to feel the benefit.

Since 2014, the allowance has been tweaked to target it more narrowly and, with more changes due from April 2020, it is important to review whether your clients are still eligible to claim.

Who can claim?

Most employers with a liability to pay employer (secondary) NIC are eligible including:

  • Sole traders, partnerships and companies
  • Charities and those with charitable status such as schools, academies and universities
  • Community amateur sports clubs
  • Employers of care or support workers (from 2015/16 onwards).

These broad categories are limited by a number of exclusions intended to target the relief.

Who cannot claim?

The following employers are not entitled to the allowance:

PSCs or MSCs

Where a personal service company (PSC) or managed service company (MSC) is subject to the intermediaries’ legislation (IR35) and there is a deemed payment of employment income, the employment allowance is not available against any secondary contributions that arise on the deemed payment. The allowance is still available where the company has employees in its own right.

Single director company

This restriction was introduced from 6 April 2016. Where the only employee paid above the secondary NIC threshold is also a director of the company, the allowance is not available.

Confusingly, while referred to as the ‘single director company’ restriction, this can also 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. 

According to HMRC, if the company has another employee or director where a secondary NIC liability arises at some point in the year, then the allowance becomes available again in full.

Many commentators disagree with HMRC’s interpretation and consider that it is sufficient simply to have another employee at some point in the year, whether or not payments to them actually trigger a secondary Class 1 liability. On that interpretation, even a payment of £1 to a second employee or director would be enough to trigger an entitlement to the allowance.

Large employers

From 6 April 2020, there will be further restrictions to target the relief to smaller employers. Where the employer’s total secondary NICs are more than £100,000 in 2019/20, then no allowance will be available in 2020/21. Each year, the availability of the allowance will be tested by looking at the contributions in the previous year. HMRC estimates this will affect around 7% of employers currently claiming the allowance.

For most businesses, it will be clear whether they are affected. For those on the cusp of £100,000 in 2019/20, then the timing of (say) bonuses in that year could determine entitlement in the payroll for April 2020.

Further guidance on the new rules for large employers is expected to be released later in 2019.

Public bodies

Public bodies or businesses where 50% or more of their work relates to work is outsourced from the public sector cannot claim the allowance, unless the employer is also a charity.

This category includes local councils, health authorities and independent business carrying out a public body duty such as refuse collection. It does not affect businesses that supply services such as cleaning or IT support to public bodies.

Employers of domestic workers

The allowance is only available where the employee is exclusively providing personal care to someone who needs support due to age or physical/mental illness. Generally, an employer of private staff such as a nanny, cook or gardener, is not entitled to the allowance.

Connected complexity  

The total value of employment allowance that can be claimed is restricted where two or more companies, which include LLPs, are connected. Similar provisions apply where two charities are connected. In this case, only one of the connected companies can claim.  

Two companies will be connected if one controls the other, or both are under common control of the same person(s) at the start of the year of claim.

A company can also be connected to the company(s) of associates of the controlling parties if they are commercially interdependent: for example, one provides financial support to the other or they share customers, premises, management or employees. For example, a husband and wife each with their own company could be entitled to only one allowance between them if the two companies are commercially interdependent.

Various schemes to try and divide employees between multiple companies to facilitate the claim of multiple allowances have been blocked by this rule. 

Summary

The employment allowance is a valuable relief for small businesses so it was perhaps inevitable that complexity would be added over time. It is also costly to get it wrong so care is needed, particularly over the connected company rules, to ensure that all employers claiming are still entitled to the allowance.

About Helen Thornley

Hele Thornley

Helen Thornley has a focus on personal and capital taxes. Initially training as an accountant before moving to tax, she worked in practice until her appointment as a technical officer in 2017. She also has an interest in the history of tax.

Replies

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02nd Apr 2019 13:37

Yet another case of the classic cycle

Introduce a simple policy

Realise it has unintended consequences because no-one thought it through.

Add ridiculous layers of complexity, many of which create other problems or don't solve the original ones.

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By Ammie
to stepurhan
03rd Apr 2019 11:44

Perfectly put.

I think this cycle can easily be rolled out to apply to many policies and general decisions made by central and local government.

The biggest and most sensitive will be those affecting Brexit, where Brussels will no doubt resist modifications it cannot benefit from. Hence the mess and protracted affair that it has become. Sorry off point!

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03rd Apr 2019 11:35

Recruitment agencies who have a history of executing their business compliantly via PAYE, albeit direct PAYE or Umbrella PAYE, are increasingly coming up against competitors (other Agencies) who are engaging with mini company models that are incorporating two directors (with one being a foreign assigned director, maybe in the Philippines), utilising the 3K NIC allowance, once 'exhausted' are P45'g them and flipping them into a 'newco' with a new 3k NIC allowance. The first agency loses out because they are adopting compliant PAYE and are having to factor the NIC into their cost of sale. The competitor does not have to factor this in and so is undercutting them due to a lower cost of sale. We have found that previously compliant agencies are being forced to engage with these models in order to survive as a business as there is mass migration to these models currently and it looks as thought T.A.A.R. / HMRC cannot or are not interested in scrutinising these models! Can anyone help?

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03rd Apr 2019 12:28

Anyone I mention this to evinces a total lack of interest.
General view is that these things are, when all is said and done, small beer compared to the hassle of working it all out - and at the end of the day its probably a trap to get a fine off you for some minor missed nuance.
I find people more and more look for 'fines traps' and find it cheaper/less hassle just to stay away.

Thanks (4)
03rd Apr 2019 12:30

Helen Thornley wrote:

According to HMRC, if the company has another employee or director where a secondary NIC liability arises at some point in the year, then the allowance becomes available again in full.

Many commentators disagree with HMRC’s interpretation and consider that it is sufficient simply to have another employee at some point in the year, whether or not payments to them actually trigger a secondary Class 1 liability. On that interpretation, even a payment of £1 to a second employee or director would be enough to trigger an entitlement to the allowance.

As stepurhan points out, this is yet another case, where a simple policy is over-complicated by being poorly thought through. This policy is designed to help encourage small employers to take on more staff by removing the burden of paying er's NI (to a limit of £3,000). It makes sense to restrict this allowance to staff and not sole (or, indeed, any) directors. So why did they not simply legislate so that the allowance could only be offset against the employer's NI of non-directors?

This would be so much simpler and would avoid the ridiculous and simple work-around where an employer need merely hire someone paid above either the LEL @ £116 or the PL @ £162 (or even just £10, depending upon your interpretation) for one week per year to enable a claim of £3,000 to be made. The point is to encourage hiring of staff, not to lower the NI paid on behalf of directors, so why did they not just legislate for that instead of the usual nonsense that requires further legislation and guidance?

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By k743snx
03rd Apr 2019 12:38

An "Emperor's Clothes" situation.
While accountants get all esoteric about it, Joe/Josie Bloggs in the street would say (if they said anything at all, that is) "why not just cut the tax for everyone"?

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to k743snx
03rd Apr 2019 15:00

For the reason I gave in my comment above. Why should a director who is the sole employee of a company get a tax (or NI) cut, when the purpose of the cut is to encourage employment of staff?

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By k743snx
to charliecarne
03rd Apr 2019 16:39

You know that, and I know that, but the aforesaid Mr/Ms Bloggs might not.
Truly its been said that Employer NI is "a tax on jobs".

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03rd Apr 2019 13:25

I am a director of several companies where we have 2 directors who have a controlling interest in both. I've been told we can only claim for 1 £3K allowance, is this true?

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03rd Apr 2019 13:29

The trouble is the politicians announce it all on Budget day, in the public glare, then give full details and conditions on the quiet, and leak it out on the coldest darkest of nights.

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04th Apr 2019 08:34

Charlie Carne - presumably it is allowed to directors to give them a helping hand in setting up a new small business. To many small companies it can be a big help in times when there is not much money available.

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21st Apr 2019 15:57

An employer need claim the allowance only once. It can then offset the sum against its secondary National Insurance contributions for each subsequent year.

Some payroll software requires employers to indicate they are entitled to the allowance at the beginning of each tax year. The employer can choose when to claim during the tax year after deducting any statutory payment reclaims such as statutory maternity pay. Now a days many organizations using employees management portal (For example, www.myloweslife.com) to resolve all issues related pay checques.

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