Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.
Employment allowance is a tax relief scheme in the UK that allows eligible small business owners with employees to apply to reduce their annual National Insurance bill by up to £4,000. As part of a government scheme to help support small businesses, those that qualify can apply for Employment Allowance to lower their outgoings.
If you’re an employer, you can apply year after year for the allowance – it isn’t just a one-time payment. If you’re eligible, you can even back-date your claim for up to four years, as long as you have an Employer Payment Summary (EPS) for each of the relevant years. Employment Allowance per year was £3,000 between 2016 and 2020.
NIC Employment Allowance is not a per employee allowance but is per business and covers the first payments of each tax year. This means that small businesses with a Class 1 contribution of over £4,000 in total will receive the allowance for each month of the financial year until it reaches the £4,000 limit. Once you reach this point, you’ll be expected to pay the balance or full monthly sum for the remainder of the year.
Who is Eligible for Employment Allowance?
The focus on who can claim employment allowance is on sole traders, limited companies and partnerships with one or more employees liable for Class 1 National Insurance contributions. Business owners need to be registered as employers to claim and have Class 1 NI liabilities of less than £100,000 for the previous tax year.
Limited companies can also apply for employer’s National Insurance allowance if they employ only directors, provided that at least two of those directors earn over the Class 1 NI contribution secondary threshold. However, employment allowance does not cover any contributions where IR35 applies. This means that when looking at how to claim employment allowance, employers cannot claim for any workers that operate outside of business payroll, including contractors and freelancers. These workers also do not count towards the threshold of £100,000 for the previous tax year.
How does Employment Allowance Work?
The current employment allowance stands at £4,000 and applies to the business as a whole rather than to individual employees. It is aimed at businesses that are likely to have only a handful of employees rather than larger companies with lots of staff. If a company has an annual Class 1 NI contribution liability of £5,500 and they are eligible for the allowance, that liability is reduced to £1,500 for the year. Companies with more than one payroll can only claim their central payroll.
Employer National Insurance is currently charged at a rate of 13.8% of salary per employee. For example, any company paying an employee an annual salary of £22,000 pays £1,816.08 each year for that employee. A business with three employees, each of whom receives £22,000 per year, will have an annual NI liability of £5,448.24. If they are eligible for employment allowance, the first £4,000 of this will be covered, leaving a total of £1,448.24 to pay.
Businesses do not have to have a National Insurance liability of over £4,000 to claim. If only one employee earns £22,000 per year, the total £1,816.08 will be covered by the claim.
Employer contributions only become payable once the entire allowance has been exhausted. If the business has a NI liability of £5,448.24, this means they would not have to pay any National Insurance for the first eight months of the financial year. They would then pay a reduced rate for the ninth month and the full amount for the remaining three months of the year.
How do I claim Employment Allowance?
Employers NI Allowance can be claimed at any point during the tax year and backdated for up to four years provided you have all the relevant paperwork. You can make the claim with HMRC as part of your Real Time Information submission, or RTI. The precise way to make a claim will vary depending on the type of payroll software you opt for, and whether your business uses HMRC’s Basic PAYE Tools.
If you’re claiming through your own payroll software, you should find an indicator field for employment allowance. If this is the case, all that is required is to tick YES when sending the next EPS to HMRC. If there is no Employment Payment Summary field included with the software, you can still use the Basic PAYE Tools software from HMRC. To stop the claim at any point, employers can check NO in their next EPS.
What are the exceptions to Employment Allowance (who can’t claim)?
If you run a small business or a charity you can apply for employment allowance, but there is eligibility criteria you need to meet. Organisations are required to be registered as employers, have had less than £100,000 in Class 1 NI liabilities in the previous tax year and have at least one employee, or two directors earning above the threshold in the case of a limited company. Employers of support workers and carers can also apply.
You won’t be eligible if 50% of your work occurs in the public sector or if you employ people for personal domestic work, such as gardeners or nannies. Companies with only a single employee who is also a company director are also ineligible to apply. There are certain exceptions that apply to the rules on public sector businesses, such as those that supply IT services, cleaning or security for local authorities or governments.
Make the most of employment allowance and you’ll save money over the course of the year, and you can benefit from backdating too, for the last four years. Find out more about employment allowance, eligibility, exceptions and how to apply on the UK government website.
Square software helps small businesses to keep track of employees, inventory and all other incomings and outgoings with ease. Implementing Square software ensures that small businesses have reliable monitoring systems for all financial transactions and provide convenient payment systems and other useful tools.