Employment Allowance – What is it and are you eligible?

This guide aims to enhance your understanding of the allowance, its eligibility criteria, and how to claim it. This is particularly important for owners of small and medium-sized businesses who can significantly benefit from this allowance. 

Employers must pay class 1 secondary National Insurance Contributions (NIC) on an employees’ earnings through the PAYE system. The rate of employers’ NIC is 13.8% and is payable on earnings above the secondary threshold. For 2024/25, the secondary threshold is £758 per month, or £9,100 per year. Employers are responsible for paying NIC to HM Revenue & Customs (HMRC).  

What is Employment Allowance? 

Employment Allowance was introduced by the Government in 2014. The allowance is available to eligible businesses, designed to help businesses reduce their annual National Insurance bill. Businesses can use the allowance to reduce their NIC liability, thereby reducing business costs. 

The allowance is a maximum of £5,000 per year, resulting in cost savings for your business. This allowance helps businesses reinvest in their operations, hire more staff, or simply reduce their overall tax burden. 

Who is eligible for Employment Allowance? 

To qualify for the Employment Allowance, your business must meet certain criteria. These include: 

• You are a business or charity 
• Your employers’ NIC liability was less than £100,000 in the previous tax year 

You must not be: 

• a public body or business doing more than half your work in the public sector (i.e. local councils and NHS services) 
• a company with only one employee paid above the Class 1 National Insurance secondary threshold and the employee is also a director of the company 

How to claim Employment Allowance 

Claiming the Employment Allowance is straightforward. Here is a step-by-step guide: 

1. Ensure eligibility: First, you must check that your business meets the eligibility criteria detailed above. 
2. Payroll software: Through your payroll software you can tick the ‘Employment Allowance indicator field’ next time your complete your payroll and send an Employer Payment Summary (EPS). 
3. Manual claiming: If your payroll software does not have this you can use Basic PAYE Tools. 

When to claim Employment Allowance

You can claim Employment Allowance at any time in the tax year without needing to have applied before it begins. The sooner you claim the allowance, the quicker your business can start saving money. 

If you missed a claim, you can ask HMRC to use any unclaimed allowance against tax or NIC you owe. Otherwise, you can arrange for a refund if you do not owe anything. 

You can claim for Employment Allowance for the previous four tax years if you did not at the time. 

What is de minimis state aid? 

The Government provides financial support known as de minimis state aid, which includes Employment Allowance. Limits exist for how much de minimis state aid some businesses can receive in a three-year period. If they exceed the limits, they cannot claim Employment Allowance. 

FAQs 

Can directors claim employment allowance? 

Companies with only one employee, who is also a director, cannot claim the allowance. 

Can small businesses claim employment allowance? 

Small and medium-sized businesses with an employers’ NI bill of less than £100,000 can utilise the employment allowance. 

Can self-employed people claim employment allowance? 

Self-employed individuals paying Class 2 and Class 4 National Insurance contributions are not eligible for the Employment Allowance. Businesses use the allowance only against their class 1 secondary national insurance liability. 

How TaxAssist Accountants can help  

The Employment Allowance is a significant benefit to businesses in the UK. Business owners can fully benefit from financial relief by understanding the eligibility criteria and claim process. Our team can help you save money on taxes and get the deductions your business deserves. 

If you would like more advice and guidance on any payroll matters, contact your local TaxAssist Accountant. Call 01332 501 122 or use our online contact form. 

Last updated: 11th June 2024