Do you understand the upcoming changes to employment allowance and how they may affect your business? Do you want to reduce your NIC payments? Read our article below to find out more information.

What is the Employment Allowance?

The employment allowance (EA) allows businesses and charities to claim up to £3,000 off their National Insurance bill.

Employers can only claim the EA if they are a business (including a Community Amateur Sports Club) that pays Employer Class 1 NICs on employee or directors’ earnings and is not funded by central government or charity.

EA is a simple process for employers as it is delivered through standard payroll software and HMRC’s real time information (RTI) system. However, it isn’t given automatically and must be claimed.

How to claim?

If you need to claim, then the employer simply signifies their intention to claim by completing a ‘yes/no’ indicator once. Ideally, the claim should be made at the start of the tax year, but it can be made at any time throughout the year.

Employers will then offset the allowance against each monthly Class 1 secondary NICs payment that is due to be made to HMRC until the allowance is claimed fully or the tax year ends.

For example:

If Employer Class 1 NICs are £1,200 each month, in April the employment allowance used will be £1,200, in May it will be £2,400, and in June £800, but the maximum is capped at £3,000.

Regardless of how many PAYE schemes that an employer chooses to operate, the EA applies per employer, so each employer can only claim for one allowance. The employer can choose which PAYE scheme to claim against.

What are the recent changes?

From April 2016, the EA was restricted so a company will no longer qualify if the only employee is also a director of the company.

The purpose of the change is to prevent the misuse of the allowance by personal service companies and focus it on businesses creating employment.

The change is estimated to affect around 150,000 limited companies with a single director.

What are the future changes?

The Autumn Budget 2018 announced details of a further restriction, which will target the allowance to businesses that really need it and this is expected to take effect in 2020/21.

From 6 April 2020, the EA will have limited access only to businesses and charities with an employer National Insurance contributions (NICs) bill below £100,000.

There are currently 1.1 million employers that claim the EA, and it is assumed that around 93% of these will continue to be eligible once the restriction takes effect, and many will pay no employer NICs at all.

Actions for you

It is worthwhile checking that the EA has been utilised where it is possible.

If a claim is made too late in a tax year to set the whole allowance against the employers NIC liability, the employer may apply to ask HMRC for a refund.

Overall, it is essential that you understand how the changes in employment allowance may affect your business as it can reduce your NIC payments.

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Any questions?

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