From April 2014, certain businesses have been eligible to claim the Employment Allowance (EA). This allows businesses to reduce their Class 1 National Insurance by up to £3,000. From 6 April 2020, the government is changing the criteria of entitlement to this, meaning not all businesses who currently benefit will be able to claim the allowance in the 2020/21 tax year.
Up until 5 April 2020, many businesses can claim a reduction for Class 1 National Insurance Contributions (NICs) that they pay. However, freelancers and contractors who work on a self-employed basis and therefore pay Class 2 and Class 4 NICs cannot use the allowance, as it is only for businesses with employees that operate under a PAYE scheme.
Furthermore, you cannot claim the allowance if you personally hire someone for domestic work, such as a nanny or a gardener, or you carry out more than 50% of your work in or for the public sector. However, some exceptions do apply to public sector workers, for example, those who supply IT, cleaning or security services for a government or local council buildings such as offices. Guidance on eligibility for employment allowance is available on the gov.uk website.
The Key Changes
- After the 6th April 2020, only small businesses (with a NIC bill of £100,000 or less) will be eligible to claim the employment allowance.
- You will not automatically qualify for EA, you must claim it each tax year by submitting a declaration.
- If you become connected with an employer through resources such as staff or premises, you must reassess your eligibility.
- The EA will be state aid and counts towards the maximum aid you can receive in a rolling three-year period. You must have room to accommodate the £3,000 EA within state aid limit or lose your entitlement to it.
How can I claim the Allowance?
For businesses that are eligible, the employment allowance is subtracted from their Employer NIC liability by their payroll software provided it has been set up correctly to do this.