Changes to the Employment Allowance from April 2020

*UPDATE: HMRC has published guidance on the changes to Employment Allowance. From April 2020 charities will need to make extra checks to find out if they are eligible to claim Employment Allowance, including checking de minimis state aid rules. Charities will continue to claim Employment Allowance through their Employer Payment Summary, but claims will not renew and charities will need to make a new claim for Employment Allowance each year.*

The Employment Allowance is a helpful relief that currently entitles most charities a reduction in their secondary Class 1 NICs liabilities of up to £3,000 per year.

A policy paper published by HMRC confirms that the (Draft) Employment Allowance (Excluded Persons) Regulations 2020 restricts access to the Employment Allowance for a tax year to employers with secondary Class 1 NIC liabilities below £100,000 in the previous tax year.  The purpose of this reform is to target the Employment Allowance to support smaller businesses.

When determining eligibility to receive the Employment Allowance – for tax years starting on or after 6 April 2020 – employers who are connected to other employers (such as companies within a group) will need to add together all of their collective secondary Class 1 NIC liabilities incurred in the tax year prior to the year of claim. If that figure amounts to £100,000 or more, none of those employers will be eligible to claim the Employment Allowance for the current tax year.

As a result of this restriction, as announced last year, from the 6 April 2020 the Employment Allowance will be operated as de minimis State aid, which means that employers must have space to accommodate the full Employment Allowance within their relevant de minimis limit. Employers who do not have space in the relevant state aid limit to accommodate the annual amount of the Employment Allowance will not be eligible to claim the Employment Allowance, even if they would not use the full annual amount of the allowance. Employers who are connected must ensure that the cumulative value of all secondary Class 1 NIC (or state aid across all connected companies) does not exceed the relevant limits.

This will apply to all employers carrying out an economic activity and so governed by state aid regulations. Employers who are not carrying out an economic activity may still be eligible for the Employment Allowance, but they do not have to comply with state aid regulations.

Employers will have to claim the Employment Allowance every year in order to receive the relief, as it will no longer be carried forward from one tax year to the next. Those engaging in economic activity will also have to notify HMRC every year to confirm that their previous year’s employer secondary Class 1 NIC liabilities were under £100,000 and to inform HMRC which state aid sectors they operate in.

HMRC undertook a technical consultation on Employment Allowance legislation last year. CTG submitted a short response to the consultation noting that charities reliant on a large workforce will no longer benefit from this relief, adding to the cumulative burden of taxation facing the sector. CTG’s response also noted that for those charities with NIC liabilities below £100,000, they will in future need to consider their overall state aid limit, particularly if they are in receipt of other reliefs subject to State Aid, such as the Retail Discount.