Who should claim the employment allowance?
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.
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.
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 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.
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.
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.
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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.