Since April 2014, UK businesses of all sizes with employees on the payroll have benefitted from Employment Allowance. But, on 24th January 2020, an announcement was made that the current employment allowance legislation will undergo changes that are likely to affect many larger businesses. A further announcement in the 2020 Budget by Rishi Sunak increased the amount available to eligible businesses.
The 2020 Employment Allowance: Excluded Persons Regulations outline a plan to reform employment allowance eligibility measures for employers. This will mean that fewer employers will be entitled to £4,000 Employer’s National Insurance (Secondary NI) relief from the 6th April 2020.
Whilst most small businesses should escape the changes and continue to benefit from the £4,000 allowance, medium to large businesses with a NI bill of £100,000 or over in the previous tax year will no longer receive the allowance.
What is employment allowance?
The Employment Allowance scheme was first introduced in April 2014. The new allowance offered employers a reduction of £2000 against their NI bill. The allowance was subject to change in April 2016, increasing to £3,000 as well as excluding single-director companies.
Claimed via the payroll process, the employment allowance helps to reduce a company’s secondary NI. Each payroll period, the business claims the allowance until either the £3,000 allowance runs out or the tax year comes to an end, whichever happens soonest.
Why is Employment Allowance changing?
Approximately 450,000 small firms in the UK take advantage of the employment allowance scheme, and around 1/3 of these companies avoid paying Employers’ secondary NI completely.
While the scheme benefits many small businesses, it also comes at a significant cost to the treasury. The new restrictions aim to recoup a percentage of the £2 billion lost through secondary NI claims.
What did employment allowance look like up to the 5th April 2020?
Employment Allowance will stay at £3,000 for the 2019/20 tax year.
Until 5th April 2020, businesses with employees can claim the Employment Allowance, unless:
- The employee is employed for domestic duties e.g. nanny or gardener
- The sole director is the only employee paid above the secondary earnings threshold
- The business is a public body or is doing more than half of its work in the public sector (unless it is a charity)
- The company only has deemed employment income under the IR35 rules.
If a business is in a group of companies or has related companies operating from the same source, only one company in the group can claim the allowance.
What has happened to employment allowance from the 6th April?
The employment allowance has increased to £4,000 and will be available with its current restrictions continuing to apply, with the addition that the Employment Allowance will only be available to businesses who had an Employers’ NI bill of £100,000 or less in the previous tax year.
For the full details of the Employment Allowance changes, please visit the Gov.uk website here.
LWA have put a procedure in place to assist client businesses who may be affected by the allowance reform. We’ll be assessing each employer at the end of the 2019/20 tax year, and will make the decision whether they are eligible for the allowance during the 2020/21 period. If you have questions about your company’s eligibility or would like to know more about the new restrictions, speak to a member of our Payroll team on 0161 905 1801.