Insights

If you have a business that employs other people, you may be eligible to an employment allowance worth up to £3,000 per year towards the cost of employers’ Class 1 NICs (national insurance contributions). This has been available since April 2014, but many employers don’t realise they are able to benefit. This article will help you find out if you could qualify since not all businesses are eligible.

Who can claim?

Anyone who employs other people and pays employers’ (secondary) NICs is eligible including:

• Sole traders, partnerships and companies;
• Charities and organisations with charitable status such as schools, academies and universities;
• Community amateur sports clubs;
• Employers of care or support workers.

Who is excluded?

If you have a PSC (personal service company) or MSC (managed service company) that is subject to IR35, you are not eligible. This is because the payments being received are classified as employment income. The employment allowance is not available against any secondary contributions on a deemed payment.

However, if a PSC or MSC has other employees in its own right, the allowance remains available. This applies even if the employee receives a minimal salary.  According to HMRC, if the company has another employee or director ‘where a secondary NIC liability arises at some point in the year’, then the allowance becomes available again. So if for example you have a PSC and employ a personal assistant, this is sufficient to entitle you to the employment allowance.

Large employers

New exclusions will come into effect for large employers from 6 April 2020, where the employer’s total secondary NICs are more than £100,000 in 2019/20. In this case no allowance will be available in 2020/21.

Subsequently, eligibility for the allowance will be tested each year, by looking at the amount of NIC contributions paid in the previous year. HMRC have said the reasoning behind this is to help improve competitiveness for smaller businesses.

Domestic workers are excluded

The employment allowance was extended to include care workers, but it is only available where the employee is providing personal care to someone who needs support due to their age or a physical/mental illness. It does not apply when workers like a nanny, cleaner, cook or gardener are employed.

Connected entities can’t each claim

In situations where two or more companies, including LLPs are connected, the total value of the employment allowance that can be claimed is restricted, and only one entity can claim the relief. The same applies where two charities are connected.

A connection is classified as being where one entity controls the other, or both are under common control of the same person(s) at the start of the year. A connection can also exist if the entities provide financial support to each other or they share customers, premises, management or employees. For example, a husband and wife each with their own company could be entitled to only one allowance between them if the two companies are commercially interdependent.

If you are not claiming the employment allowance and think you should be, we can help you to apply and also evaluate whether any of the exclusions might apply. It’s a valuable relief but it can be costly to get it wrong, so care is needed, particularly over the connected company rules, to ensure that all employers claiming are still entitled to the allowance.

RJP can help you with practical advice on the different tax reliefs available to business owners and can help you to reduce the amount of tax you need to pay.