Proposed changes to employer tax breaks could mean more than a million firms will be paying more towards their employers national insurance contributions (NICs).
Draft legislation published today outlines plans to restrict access to the Employment Allowance to smaller companies.
The allowance currently enables all employers to claim £3,000 relief annually for each payroll they run. However, from 6 April 2020, the allowance will be available only to firms whose tax bill for secondary Class 1 NICs falls below £100,000.
HM Revenue & Customs (HMRC) said the change was designed to refocus the allowance on its original intended beneficiaries – smaller businesses looking to take on their first employees – and that it expected the move to impact nearly 1.2 million businesses currently receiving the benefit.
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As part of the changes, employers will also have to claim the Employment Allowance every year, as it will no longer be carried forward from one tax year to the next.
Guidance from the government said employers would need to familiarise themselves with the changes and identify if they were eligible for the allowance each tax year.
Paul Holcroft, associate director at Croner, encouraged businesses to review their current NICs to establish whether they would be affected. Employers that expect to lose the benefit might need to undertake a review of current cash flow and financial resources to prevent a gap in their accounts.
“Although currently only a draft proposal, planning ahead and reviewing how this change might affect your business will help to prevent any detrimental impact to the ability to fund staffing costs come next year,” Holcroft said.
“In the meantime, employers are encouraged to remain up to date with the ongoing consultation on this matter to ensure any confirmed plans are fully understood, especially if there are any technical changes during the consultation stages.”
The change to the Employee Allowance was initially proposed by Chancellor Philip Hammond in his October 2018 budget speech.
Hammond said at the time: “At a flat rate of £3,000 per employer, [the allowance] does not provide any real incentive for larger employers. So from April 2020, we’ll target it at small and medium businesses with an employer NICs bill under £100,000 a year.”
The Employment Allowance was first announced in the 2013 Budget as an entitlement of £2,000 a year for businesses, charities, and amateur sports clubs. It was introduced with the intention of supporting smaller businesses wanting to hire their first employee or expand their workforce.
It was formally introduced in the National Insurance Contributions Act 2014 and was reformed from April 2016 to increase the value of the relief to £3,000 and to exclude single director companies.
HMRC said it was still mapping the operational impact of the changes and that guidance was being updated to provide additional information to businesses.
Some increased contact was expected from businesses seeking to clarify the new rules and their eligibility. As part of the reforms, current claimants will receive a letter before the end of this tax year informing them of the changes and what they need to do.
The government is now welcoming comments on the draft documents.