The HMRC has been publishing 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. It 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. HMRC announced it as an entitlement of £2,000 a year for businesses, charities, and amateur sports clubs. When 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. Then it was reformed in April 2016 to increase the value of the relief to £3,000. Additionally to exclude single director companies. In 2020, they will reform the legislation again. Then, HMRC will administer it as de minimis state aid in order to ensure it complies with EU state aid rules.
What will change?
Currently, the allowance means all employers can 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. This is why HMRC is removing the relief 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 expects 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. Because 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.
After being published at the end of June, it is subject to consultation until 20th August 2019. However, we do not expect any key points to change within that time. Therefore, 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. As well as ensuring you fully understand the intended changes and what they mean for your business.
The changes will affect all employers in some form or another. Therefore, you need to make sure you’re acting within the law when the changes come into play.
We are proud to be leading chartered accountants in Brierley Hill. We have plenty of experience under our belts, and therefore are experts when it comes to tax advice for businesses. 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.