The HMRC has published draft legislation to restrict access to the employment allowance for a tax year to employers with secondary Class 1 National Insurance contributions (NICs) liabilities below £100,000 in the previous tax year. The new restrictions will apply to the NI Employment Allowance (EA) from April 2020. So what do you need to know?
What is employment allowance?
Employment allowance is a benefit, which entitles most businesses and charities to a reduction in their secondary Class 1 NICs liabilities of up to £3,000 per year. It was first announced in the 2013 Budget as an entitlement of £2,000 a year for businesses, charities, and amateur sports clubs. When it was introduced, the intention was to support smaller businesses wanting to hire their first employee or expand their workforce. In 2014 it was formally introduced in the National Insurance Contributions Act and was reformed in April 2016 to increase the value of the relief to £3,000 and to exclude single director companies. In 2020, the legislation will be reformed again and it will be administered as de minimis state aid in order to ensure compliance with EU state aid rules.
What will change?
Currently, the allowance enables all employers to claim £3,000 relief annually for each payroll they run. However, from 6 April 2020, the allowance will only be available to business’ whose tax bill for secondary Class 1 NICs falls below £100,000.
Why the change?
Originally, the intended beneficiaries of Employment Allowance were smaller businesses. The reform is designed to refocus this intention. That is why the relief is being removed from larger employers who incur employer secondary Class 1 NICs liabilities of £100,000 or more in the tax year immediately before the year of claim. The reform is expected to impact nearly 1.2 million businesses currently receiving the benefit.
The changes also mean that employers will have to claim the Employment Allowance every year, as it will no longer be carried forward from one tax year to the next.
Key changes overview
The changes to the Employment Allowance legislation will affect all employers to a certain extent. As of 6 April 2020 the following changes will be in place:
• If your liability to employers’ Class 1 NI in the previous tax year exceeded £100,000 you won’t be entitled to the EA.
• You won’t automatically qualify for the EA. Each year you must submit a declaration confirming that you’ve checked and are satisfied that you meet all the conditions for eligibility.
• If your circumstances change and you share resources such as premises or staff, you are responsible for reassessing your eligibility for the EA.
• The EA will be state aid and counts towards the maximum aid you can receive in a rolling three-year period. You must be able to accommodate the whole £3,000 EA within the state aid limit or lose your entitlement to it.
The draft legislation was published at the end of June and is subject to consultation until 20th August 2019. However, it is not expected that any of the key points will change within that time so it’s a good idea to plan ahead and review how this change might affect your business. This will help to prevent any detrimental impact to the ability to fund staffing costs come next year. In the meantime, it’s a good idea to stay up to date with the new legislation and ensure you fully understand the intended changes and what they mean for your business.
The changes will affect all employers in some form or another, so you need to make sure you’re acting within the law when the changes come into play.
As ever, please don’t hesitate to get in touch about employment allowance by heading to our website. Or call 01384 261300 to discuss how it will affect you as an employer and the steps you will need to take.. Or call 01384 261300 to discuss how it will affect you as an employer and the steps you will need to take with one of our expert West Midlands chartered accountants.