Employers need to consider the connected company rules before claiming either the Apprenticeship Levy Allowance or Employment Allowance. The same tests apply for both the Apprenticeship Levy and Employment Allowance, but the way each allowance operates is different.

How the Apprenticeship Levy Allowance applies to connected companies

The Apprenticeship Levy is charged at 0.5% of an employer’s annual pay bill (earnings subject to employer Class 1 secondary National Insurance contributions, including wages, bonuses and commissions). However, each employer has an annual £15,000 levy allowance per tax year. That means an employer with no connected companies will typically only pay the levy if its annual pay bill exceeds £3m.

Connected companies are treated as one unit for the purposes of this allowance. Their combined pay bills determine whether the £3m threshold has been exceeded, and they only have one £15,000 levy allowance. The group may allocate that allowance between companies, including allocating nil to any given PAYE scheme, but the total across all the connected companies cannot exceed £15,000.

How the Employment Allowance applies to connected companies

The Employment Allowance reduces the amount of employer Class 1 National Insurance Contributions payable to HMRC. For the 2026/27 tax year, the maximum allowance is £10,500.

Previously, the allowance was only available where the employer Class 1 NIC payable to HMRC in the preceding tax year was less than £100,000, but this restriction has since been removed. This means that, from the 2025/26 tax year onwards, many more businesses are eligible to claim the allowance. Note that some exclusions do still apply, including the fact that Public Bodies are not eligible for the allowance.

Again, for the purposes of this allowance, connected companies are treated as one unit. However, in contrast to the Apprenticeship Levy Allowance, the Employment Allowance must be claimed solely by one PAYE scheme within the group and cannot be split.

When are companies connected?

Broadly, two companies are connected if one controls the other, or both are controlled by the same person or persons. Control can arise directly or indirectly through voting power, share capital, rights to income or rights to assets on a winding-up. Companies may also be connected through an intermediate company, such as an overseas parent company. The rules can be complex and so should be reviewed in detail.

The position should be considered at the start of the tax year. If companies are connected at that point, they then remain connected for these purposes for that year, even if ownership later changes. Conversely, companies that join a group part way through a tax year will not be deemed to be connected until the start of the next tax year.

How to manage connected company compliance

The key point here is that although more businesses than ever may be eligible to claim these allowances, they should not be claimed without thought. Consideration must be given as to whether a company may be connected to another entity, even by virtue of an overseas parent, as a result of these rules.

To maintain compliance, companies must document processes, procedures and controls covering this matter. In particular, they must keep an ongoing dialogue with other group companies and stay aware of group structure changes in real time.

HMRC’s publication Help with the Apprenticeship Levy and Employment Allowance: connected entities (GfC10) offers useful guidance to help businesses make sure that they comply with the rules.

If you have any further queries, please contact David Williams-Richardson or your usual RSM contact.

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