1. Introduction

Employment Allowance (EA) is a tax relief administered by HM Revenue & Customs (HMRC) that allows eligible UK employers to reduce their annual National Insurance contributions (NICs). The allowance is intended to support businesses, particularly SMEs, by lowering employment-related costs.

Recent legislative changes from 6 April 2025 have increased the value of the allowance and adjusted certain eligibility criteria. This report outlines the updated position regarding the restriction of Employment Allowance claims for connected companies, the criteria for connection, and compliance requirements.

2. Overview of Employment Allowance

Since its launch in April 2014, Employment Allowance has been available to qualifying employers. Key features of the scheme for the 2025/26 tax year include:

• A maximum allowance of £10,500 per tax year.
• Applied through the employer’s payroll via the PAYE system.
• Only one claim allowed per group of connected companies.
• From April 2025, the previous eligibility restriction for employers with NIC liabilities of £100,000 or more in the previous tax year has been removed.

3. Definition of Connected Companies

For Employment Allowance purposes, companies are considered connected if:

• One company has control over another, or
• Both companies are under the control of the same person(s) or legal entity.

This rule ensures that related companies cannot each independently claim the Employment Allowance and are treated as a single economic entity for eligibility and claiming purposes.

4. Restriction on Connected Companies

Where two or more companies are connected:

• Only one company within the connected group can claim the Employment Allowance for a given tax year.
• The companies must decide among themselves which entity will make the claim.
• The chosen company applies for the allowance through its payroll system and submits an Employment Payment Summary (EPS) to HMRC.
• The claim is ideally made at the start of the tax year, though retrospective claims within deadlines remain possible.

Example:
If Company A and Company B are both controlled by the same individuals:

• If Company A claims the Employment Allowance for the 2025/26 tax year, Company B cannot claim it during that same period.

5. Compliance and Record-Keeping

Connected companies must maintain suitable records evidencing:

• The existence of any connections under the relevant rules.
• The decision as to which company will claim the Employment Allowance.
• The group’s total secondary Class 1 NIC liabilities, if relevant to internal financial planning.

HMRC may request this documentation in the event of a review or enquiry. Failure to comply can result in:

• Recovery of incorrectly claimed allowances.
• Interest and penalties being applied by HMRC.

6. Recent Legislative Changes (Effective 6 April 2025)

The Spring Budget 2025 introduced the following changes:

• Allowance Increase: The Employment Allowance increased from £5,000 to £10,500 per tax year.
• Removal of £100,000 NIC Threshold: The restriction preventing employers with total secondary Class 1 NIC liabilities of £100,000 or more in the previous tax year from claiming the allowance was abolished.

This change widens eligibility, allowing more connected groups — including larger employers previously disqualified — to benefit from the allowance.

7. Conclusion

The restrictions surrounding Employment Allowance claims for connected companies are designed to ensure fairness and prevent multiple claims from effectively the same business operation. The recent increase in the allowance and the removal of the NIC liability threshold from April 2025 enhance the benefit’s value and scope.

However, connected companies must carefully manage their eligibility, select the claiming entity, and maintain thorough records to remain compliant and optimise tax efficiency.

8. Recommendations

• Annual Group Review: Identify all connected companies at the start of each tax year.
• Determine Eligibility and Claiming Entity:
• Assess eligibility for the £10,500 Employment Allowance.
• Decide which company within the group will claim the allowance.
• Documentation:
• Keep written records of group structure, NIC liabilities, and the rationale for the selected claimant.
• Compliance Monitoring:

Ensure payroll and finance teams understand the rules and restrictions.