In broad terms, the Employment Allowance (EA) is available to most employers and should enable them to reduce the amount of National Insurance Contributions (NICs) they have to pay by up to £3,000 per year. The eligibility rules changed from April 2016, and the Autumn Budget 2018 announced further changes expected to take effect from April 2020. It is worth checking to make sure that a limited company is still eligible to benefit from this tax incentive.
Employers may generally claim the EA if they are a business (including a Community Amateur Sports Club) that pays employer Class 1 NICs on employees’ or directors’ earnings and is not funded by central government or a charity.
The EA was restricted from April 2016, so that a company no longer qualifies where all the payments of earnings it pays in a tax year, in relation to which it is the secondary contributor, are paid to or for the benefit of one employed earner only who is, at the time the payments are made, also a director of the company. The purpose of the change was to prevent perceived misuse of the allowance by personal service companies and help focus it on businesses creating employment. The Government estimated that this change affected around 150,000 limited companies with a single director.
The Autumn Budget 2018 announced details of a further restriction, expected to take effect in 2020-21, which aims to target the allowance on businesses that need it most.
From 6 April 2020, access to the EA will be limited to businesses and charities with an employer National Insurance contributions (NICs) bill below £100,000.
Currently some 1.1million 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.