In 2014, the government introduced the Employment Allowance to give small businesses some relief on staffing costs.

It can give your business a real boost if you’re trying to grow. We’ll be looking at what the Employment Allowance is and whether your firm is eligible.

What is Employment Allowance?

Note that the allowance is per business, not per employee.

Employment Allowance allows employers to reduce their National Insurance liability by up to £5,000 per tax year. This means you’ll pay less Employers’ Class 1 National Insurance each time you run your payroll or until the tax year ends, whichever comes first. You can only claim against class 1 National Insurance if your allowance is up to £5,000.

The good news is that you can claim if your liability was less than £5,000 last year. In fact, you can claim Employment Allowance for previous four years, dating back to the 2018/19 tax year, but maximum thresholds were lower than they are at the moment.

Employment Allowance was:

• £4,000 each year between April 6, 2020 and April 5, 2022
• £3,000 each year between April 2016 and April 2020

What taxes does a business pay when employing staff? – Businesses that employ staff have an obligation to collect and pay taxes to HMRC in relation to that employment, as Emma Twynholm explains

Am I eligible?

You can claim Employment Allowance if you’re a business or charity – this includes community amateur sports clubs – if your employers’ Class 1 National Insurance liabilities were less than £100,000 in the previous tax year.

If you have or had more than one employer PAYE reference, the total Class 1 NI liabilities for your combined payrolls must be less than £100,000 in the previous year. You can only claim Employment Allowance against one of the payrolls.

You can also claim if you employ a care or support worker.  

“If your business is eligible, you have up to £5,000 you can offset against any of your employer class 1 NI liabilities for the current tax year,” says Suzanne Gallagher, head of UK payroll at Employment Hero. “You can do this by simply reducing your monthly PAYE/NICs payment by employer class 1 NI until all the £5,000 allowance has been used. Most payroll software will do this automatically for you.”

It’s possible that you could be eligible for other schemes too. “If your class 1 NI is even lower [less than £45,000] you may be entitled to ‘Small Employers Relief’. This could allow you to claim back 103 per cent of parental pay for your employees – things like maternity and adoption leave,” Mark Hopkins, finance assistant at Balance, tells Small Business.

You don’t need to take Employment Allowance into account when calculating the threshold for Small Employers’ Relief.

As with other government support, take de minimis state aid into account as Employment Allowance now counts towards it for some businesses. “From April 2020 you need to check how much of any other state aid you have received as there is a limit for each sector and you cannot go above this,” says Gallagher. For the tax years 2018/19 and 2019/20, however, it doesn’t matter how much your employers’ Class 1 National Insurance liability was or how much de minimis state aid you received.

Non-eligibility

Payments to off-payroll workers are known as “‘deemed payments”. Class 1 liabilities on deemed payments don’t count towards the £100,000 threshold.

You also can’t claim if you’re a public body or your business does more than half of its work in the public sector. If you only have one employee paid above the Class 1 National Insurance secondary threshold or if the employee is also a director of the company, you won’t be able to claim.

Employees whose earnings are within the IR35 “‘off-payroll working rules”’ can’t be included in your claim. Someone who you employ for personal, household and domestic work (say a cleaner or a gardener) won’t count either. The only exception is for the aforementioned care or support worker.

How do I claim Employment Allowance?

“Claiming Employment Allowance is not an automatic process, but it is relatively simple,” Linda Wright, operations manger at PayEscape, tells Small Business. “It will need to be ‘re-applied’ for every tax year, as eligibility criteria may change or be updated.”

How you apply depends on whether you use your own payroll software or HMRC’s Basic PAYE tools.

If you use your own payroll software, put “‘Yes” in the Employment Allowance Indicator’ field next time you send an Employment Payment Summary (EPS) to HMRC. However, if your payroll software doesn’t have an Employment Payment Summary field, you can use basic PAYE tools.

If you use HMRC’s Basic PAYE tools, follow this step-by-step:

• Choose the correct name in the ‘Employer’ menu on the homepage
• Select ‘change employer details’
• Click ‘Yes’ in the Employment Allowance Indicator field
• Answer ‘Yes’ to ‘Do state aid rules apply?’ question if de minimis state aid rules apply to you. Otherwise, answer ‘No’ and select ‘State aid rules do not apply’.
• Send your EPS as normal

You’re not automatically entitled to the full amount – it depends on your employees’ NICs.

Five small business taxes you need to know about – Here, FreeAgent’s Emily Coltman presents five small business taxes that you need to know about

Calculating National Insurance contributions

Samantha O’Sullivan, policy lead at the Chartered Institute of Payroll Professionals, explains:

“As an employer, you must calculate class 1 National Insurance contributions [NICs] based on your employees’ pay. You’ll calculate primary class 1 NICs which are deducted from your employees’ pay; you’ll also calculate secondary class 1 NICs, which as an employer, you’ll cover the cost of. 

“So, let’s think about when employees and employers start paying class 1 NICs. Primary class 1 NICs, for your employee contributions, are deducted from employees once they’ve received £242 per week; £1,048 per month or £12,570 per year. However, employers will pay secondary class 1 NICs when employees receive a lower rate of pay; £175 per week; £758 per month or £9,100 per year. This means employers pay more class 1 NICs than employees. 

“The rates at which class 1 NICs are calculated differ for employees and employers, depending on the class 1 NICs threshold and will also differ depending on the employee’s NI category. In total, there are over 12 different NI categories, so I won’t get try and cover it here! To find out more information on NI rates, thresholds and categories, please review the Gov.uk pages.”

How do I stop my claim?

If you stop being eligible, select ‘No’ in the ‘Employment Allowance indicator’ field in your next EPS.

That said, you shouldn’t select ‘No’ just because:

• You’ve reached the £5,000 limit before the end of the tax year – this does not make you ineligible – you’ve just maxed out your limit for that tax year
• You’re no longer employing anyone – this allowance will stop at the end of the tax year

If you stop your claim before the end of the tax year (April 5), any allowance you’ve been given that year will be removed. You’ll need to pay any employers’ (secondary) Class 1 National Insurance due.

When do I claim?

Claim at any point in the tax year, just be aware that the earlier you claim, the earlier you’ll get your allowance.    

If you claim late and do not use your Employment Allowance against your employers’ Class 1 National Insurance liabilities, you’ll have to ask HMRC to do one of the following:

• Use any unclaimed allowance at the end of the year to pay any tax or National Insurance you owe (including VAT and Corporation Tax if you do not owe anything on your PAYE bill)
• Give you a refund after the end of the tax year if you don’t owe anything

When can I start using my allowance?

You can start using your Employment Allowance as soon as you submit your claim. HMRC won’t send you a confirmation letter for your allowance. If your claim is rejected, however, you’ll receive an automated message from HMRC within five working days.

Find out how much Employment Allowance you’ve used in your HMRC online account.

When your Employment Allowance counts as de minimis state aid

If you have included a business sector in your claim, HMRC will send a letter stating that your Employment Allowance counts as de minimis state aid.

Keep this letter as you might need it if you want to apply for other de minimis state aid.

More on employing staff

8 key things to do when employing people – Follow these steps to manage employment costs and ensure a productive relationship with new employees