What is the Employment Allowance?

What is the Employment Allowance?

Small businesses need all the help they can get rebuilding staff numbers after economic disasters such as the Covid pandemic.

The UK’s Employment Allowance is a crucial benefit as it aims to help eligible employers take on new staff by cutting their annual National Insurance liability by up to £4,000. Not surprisingly, this is popular with companies and the number using it increased from 1,175,000 in 2018/19 to 1,198,000 in 2019/20.

With the allowance, the employer’s National Insurance you pay is less for each payroll until you use up the £4,000 or the tax year ends, whichever comes sooner. You can still claim if your liability was under £4,000 a year.

Are you eligible for the Employment Allowance?

You can receive the Employment Allowance if you are a business or charity, and your employer’s Class 1 National Insurance liabilities were below £100,000 in the previous tax year.

You can also claim the Employment Allowance for the previous four tax years back to 2016/17, though some rules are different for previous years.

Because the goal is to encourage recruitment, companies with only one employee cannot claim this allowance. You also cannot claim it for certain types of employee, including off-payroll contractors and personal domestic workers, such as nannies or gardeners - though domestic care or support workers are exempt.

Finally, organisations doing over half their work in the public sector cannot claim, unless they’re a charity.

If you are part of a group, the total employers’ Class 1 National Insurance liabilities for the collective must be under £100,000. Only one company in the group can receive the allowance.

If you have more than one employer PAYE reference, the total employers’ Class 1 liabilities for your combined payrolls must be under £100,000 for the previous tax year. You can only claim the Employment Allowance for one of the payrolls.

If you make or sell services or goods, Employment Allowance counts towards your ‘de minimis state aid’ and there is a limit to how much aid you can receive over a three-year period. Even if you make no profit, you must work out how much state aid you’ve received and stay within your threshold.

You don’t need to do this if you do not make or sell goods or services, for example, you’re a charity, amateur sports club or you employ a care worker.

How to claim the Employment Allowance

The way you claim depends on whether you use payroll software or HMRC’s Basic PAYE Tools.

To claim through your payroll software, select ‘yes’ in the Employment Allowance field next time you send an employer payment summary (EPS) to HMRC.

If your payroll software has no EPS field, claim Employment Allowance using Basic PAYE Tools.

When to claim

You can claim the Employment Allowance every tax year. You can claim any time in the year - the earlier, the sooner you get the allowance. You can begin using your allowance as soon as you submit your claim. HMRC will not send confirmation but will notify you within five working days if it rejects your claim.

If you claim late, you can ask HMRC to use any unclaimed allowance to pay any National Insurance or tax you owe, or give you a refund.

Your HMRC online account shows you how much Employment Allowance you’ve used.

Take care when stopping your claim

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

But don’t do this just because you’ve hit the £4,000 limit before year end - this does not make you ineligible. Also, do not select ‘no’ if you no longer employ anyone - the allowance stops at the end of the tax year.

If you stop claiming before the tax year end, any allowance you’ve received that year will be removed. You will have to pay any employers’ Class 1 National Insurance due.

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