Employers must plan ahead for EA restriction

Newsletter issue - September 2019.

The Employment Allowance (EA) is a valuable relief, particularly for small businesses as it potentially cuts the business's national insurance contributions (NIC) bill by allowing a pre-set annual amount to be offset against PAYE NIC costs. The current limit is £3,000, and it is widely available to most employers. However, from April 2020 the allowance is being restricted to smaller businesses with an NIC bill of less than £100,000 in the previous tax year.

Current claims

Most employers with a liability to pay employer (secondary) NIC are eligible to claim the EA, including:

Certain types of business are ineligible to claim the EA deduction, including:

Future claims

From 6 April 2020, access to the EA will be limited to businesses and charities with an employer NIC bill below £100,000. At present, around 1.1 million employers claim the EA and the government estimates that around 93% of these will continue to be eligible once the restriction takes effect, with many paying no employer NICs at all.

How to claim

EA is generally delivered by the employer through standard payroll software and HMRC's real time information (RTI) system. However, it isn't given automatically and must be claimed. Claiming is very straightforward - the employer simply signifies his intention to claim by completing the 'yes/no' indicator just once. Although, ideally, the claim should be made at the start of the tax year, it can be made at any time in the year.

The employer 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 fully claimed or the tax year ends.

It is worthwhile checking that the EA has been utilised where 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 HMRC for a refund.

For most businesses, it will be clear whether they will be affected by the forthcoming restriction on EA. However, for those on the cusp of £100,000 in 2019/20, then the timing of, say, bonuses in that year could determine entitlement in the payroll for April 2020.