The employment allowance was introduced with effect from 6 April 2014 to support employers to grow and hire new staff by reducing employer National Insurance contributions (NICs) up to the amount of the allowance. However, it is capped at a maximum of £3,000 regardless of the size of the employer organisation, and where two or more companies are connected, only one may claim the allowance. It is therefore less likely to be a significant incentive for larger employers to take on new employees, and from next year the Government has decided to further target it at smaller businesses.
The employment allowance can be claimed by:
- businesses or charities (including community amateur sports clubs); and
- individuals who pay a care or support worker.
It can only be claimed against one employer PAYE reference and if it has inadvertently been claimed against two PAYE schemes, the relevant amount must be repaid by adjusting the relevant payroll records.
The employment allowance cannot be claimed:
- by companies where a director is the only employee on the payroll paid earnings above the secondary threshold for Class 1 NICs; or
- by public bodies or businesses doing more than half their work in the public sector (eg local councils and NHS trusts), unless the claimant is a charity.
Furthermore, the employment allowance may not reduce employer NICs liabilities in relation to:
- employees employed for personal, household or domestic work (eg a nanny or gardener), unless they are a care or support worker;
- deemed payments of employment income under the IR35 off payroll working rules; or
- employees whose employment relates to a business transferred to the employer during the tax year.
Can employment allowance claims be made for a previous year?
Yes, absolutely, so long as the claim is made within four years of the end of the relevant tax year. Earlier year updates (EYUs) will need to be filed to confirm eligibility for the allowance in each relevant tax year. The amount claimed will be added as a credit to the employer’s PAYE account. This can then be transferred to cover other tax liabilities (eg VAT or corporation tax) or a request can be made for the amount to be repaid directly.
How to establish if the employment allowance has been claimed
If RSM handles payroll administration on your behalf, the easiest thing to do is to contact your local RSM payroll executive. Alternatively, you can visit your online HMRC account and review the ‘liabilities’ section for clarification.
Sole director payrolls where employment allowance previously claimed
In some cases, that will be fine. The restriction on the availability of the employment allowance to companies where a director is the only employee paid earnings above the secondary threshold for Class 1 NICs was introduced from 6 April 2016. However, where employment allowance has been claimed in error since that date, this must be corrected via EYUs and the additional employer NICs paid over to HMRC.
What is changing?
From 6 April 2020, employers will only be entitled to claim employment allowance if they had an employer NICs bill of less than £100,000 in the previous tax year.
This change effectively withdraws employment allowance for medium to large sized businesses, with many employers with a gross annual wage bill of more than c.£850,000 affected by the change. Given the low value of the employment allowance, the change means that it will be targeted at employers that are likely to consider the benefit it provides to be material.
For more information please get in touch with Steve Sweetlove.