Changes to the UK Employment Allowance

Changes to the UK Employment Allowance

The eligibility rules for the UK’s Employment Allowance are about to change: what do UK employers need to know?

The Employment Allowance (EA) lets certain businesses in the UK claim up to £3,000 against their secondary Class1 National Insurance contributions (NIC) every year. The allowance is available to most businesses and charities but from 6 April 2020 the eligibility for claiming EA is changing.

With the implementation date on the horizon, HMRC has issued guidance to help businesses prepare for the change.

How is the EA changing?

From 6 April 2020 extra criteria will be introduced to establish whether employers are eligible to claim EA. These will include checks on de minimis state aid and on total NIC contribution amounts.

In another change, employers will now have to make new EA claims every year rather than having their claim renew automatically. EA claims will still be made through the Employer Payment Summary (EPS).

What are the new eligibility criteria?

Total NIC Contributions: After 6 April 2020, employers will only be able to claim EA if their total secondary Class 1 NIC bill for the previous tax year is below £100,000.

Deemed payments: When working out their contribution amount, employers do not need to include deemed payments such as those made to off-payroll workers. Since employers cannot claim EA for this category of worker, the payments do not count towards the £100,000 limit.

Connected companies: Connected companies must add together their total Class 1 NIC bills to establish EA eligibility:

  • If the total NIC bill for all companies in the group is over £100,000, none of the companies will be eligible for EA.
  • If the total NIC bill for all companies in the group is under £100,000, only one of the connected companies will be able to claim EA.

How does de minimis state aid affect EA eligibility?

From 6 April 2020, EA will be classified as de minimis state aid. That means that an employer's EA will be counted towards the de minimis cap (or ceiling) available in a 3-year period, and it will be subject to de minimis state aid rules.

De minimis rules: De minimis state aid rules apply when a business engages in economic activity (providing goods and services to a market), even if that activity does not result in a profit. The scope of the rules means that they will apply to most businesses eligible for EA.

De minimis rules do not apply to businesses or individuals that do not engage in economic activity, such as charities, amateur sports clubs, or personal carers. These types of businesses and individuals may still be able to claim EA.

State aid ceilings: The de minimis state aid ceiling is worked out over a 3-year period and varies by sector. Businesses must check to see if they have received de minimis state aid for the current claim year, and the previous 2 years, to calculate their available ceiling. Since EA was not previously classified as de minimis state aid, the 3-year threshold will not immediately apply to most EA eligible businesses in the UK.

De minimis state aid (and ceiling limits) are worked out in euros. The current ceilings are:

Business Sector

Ceiling

Production of agricultural products

€20,000

Fisheries and aquaculture sector

€30,000

Road freight transport sector

€100,000

Other, industrial (everyone else)

€200,000

Connected companies: Like the EA-only rules, connected companies must consider the total amount of de minimis state aid their group has received in the available 3-year period to ensure that it does not exceed the relevant ceiling and affect their EA claim.

Businesses are normally told in writing whether the aid they are receiving is considered de minimis state aid. If written verification is not received they should work out the aid amount using current exchange rates to ensure their EA claim does not exceed the relevant ceiling.

Businesses in multiple sectors: Businesses that span 2 or more sectors should check the space available under the relevant sector ceilings in order to claim the full amount of EA available to them. The full £3,000 EA amount can be claimed via multiple ceilings or via a single ceiling.

In practice, employers can claim EA for a single employee working in a given sector until the de minimis state aid ceiling in that sector is reached. Employers can continue to claim EA in another sector as long as space is still available under that ceiling.

If a business works across multiple sectors and only has space to claim EA under the ceiling of one of those sectors, but has no NIC liability in that sector, then it will not be eligible to claim EA.

What should employers do now?

Employers should take steps to update their payroll departments and tax agents and ensure that their employees are prepared for the new EA eligibility criteria. Practically, that means checking secondary Class 1 NIC liabilities and de minimis state aid ceilings to establish how much EA can be claimed.

For more information on the UK tax and payroll landscape, browse activpayroll's Global Insight Guide, which also contains background on the UK's economic profile, major industries, business practices and more.

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