You’ve been an owner manager of a company for some years. Recently, you have set up a new company with a work colleague. Are both companies entitled to the employment allowance (EA) and if not which of them is?
What is Employment Allowance (EA)?
The employment allowance (EA) has been with us since 2013 but has been tweaked and tinkered with along the way. The effect of the EA is to reduce employers’ NI bills by £5,000 (since April 2022) per year. For many smaller businesses it completely eliminates an NI bill.
Claiming the allowance
While most smaller employers are eligible to claim the allowance, there are exceptions. The main two are where:
- a business’ employers’ Class 1 NI liability in the previous tax year exceeded £100,000; and
- Companies have only one employee and that person is a director.
Claiming the EA
Claiming the EA just requires a tick box on the first payroll submission to HMRC in the tax year, declaring that your business meets the eligibility conditions. The EA is given by allowing employers to keep the first £5,000 of any employers’ NI due instead of paying it over to HMRC. Trap. If you own, or partly own, two or more businesses, they may have to share one EA between them.
Sharing the EA
The Trap above applies:
- if you’re self-employed in two or more businesses, even if they are entirely separate, e.g. if you’re a hairdresser and own a cattery. Any of the £5,000 EA not used by one business can be set against the NI liabilities of the other(s)
- where two or more companies are connected and interdependent, i.e. they use common resources such as premises or staff, or have common customers. With one exception, explained below, connected means where one company controls the other or the same persons control both; or
- where two or more limited liability partnerships are connected. Broadly where one has the right to more than 50% of the other’s assets or income.
The condition which limits connected companies to one EA between them applies only at the start of each tax year. So where you already own one company, and either start or acquire another company later in the tax year, both can claim the EA for that year, but for the following and later years they must share one EA.
Tip. Even where you would expect the Trap to apply because two or more businesses are connected, loopholes in the rules mean that each is entitled to claim the EA.
Different business structures
The Tip above applies if you own two businesses through different structures. For example, if you are self-employed and own or control a company, each businesses is entitled to its own £5,000 EA. The same applies if, say, you’re a sole trader but are also a partner in a business.
Companies and limited liability partnerships under common ownership or control must share a single EA. However, this rule doesn’t apply to unincorporated businesses, i.e. sole traders and partnerships. This means you can own two businesses with different ownership structures, e.g. a company and sole trader, and both can claim a full EA.