Employment Allowance is a valuable government relief designed to help UK employers reduce their National Insurance Contributions (NICs) by up to £5,000 annually. This initiative is particularly beneficial for small and medium-sized businesses, as it lowers employment costs and supports cash flow management.
In this guide, we’ll explore what Employment Allowance is, who can claim it, how much you can claim, and how to apply.
What Is Employment Allowance?
Employment Allowance is a scheme aimed at reducing the NIC liability for eligible businesses. By offering up to £5,000 off Class 1 NICs each year, it helps companies manage one of their largest operational expenses: employment costs.
This relief not only improves cash flow but also supports business growth by freeing up resources that can be reinvested in staff or operations.
How Much Can You Claim?
Currently, Employment Allowance is capped at £5,000 per tax year. Once claimed, it is automatically applied to your NIC liability, reducing the amount owed to HMRC with each payroll run.
- Important Note: If your NIC liability is less than £5,000 for the year, the unused portion of the allowance will not roll over to the next tax year. Businesses should ensure they claim and utilise it fully within the same tax year.
Who Can Claim Employment Allowance?
General Eligibility Criteria:
To qualify for Employment Allowance, your business must meet the following criteria:
- NIC Threshold: Your Class 1 National Insurance liability in the previous tax year must have been less than £100,000.
- Business Type: Eligible entities include small and medium-sized businesses, charities, and certain public organisations.
Who Cannot Claim:
Some businesses and employers are excluded from claiming Employment Allowance, including:
- Companies with only one director and no other employees.
- Domestic employers, such as those hiring nannies or gardeners.
- Businesses with an NIC liability exceeding £100,000 in the previous tax year.
- Public sector employers or contractors primarily involved in public sector work.
How to Claim Employment Allowance
Using Payroll Software:
The most straightforward way to claim Employment Allowance is through payroll software such as QuickBooks, Xero, or HMRC’s Basic PAYE Tools. During setup, indicate that your business is eligible for the allowance.
Once claimed, the allowance will automatically reduce your NIC liability each time payroll is processed until the full £5,000 is utilised or the tax year ends.
Backdating Claims:
If you were eligible for Employment Allowance in previous years but didn’t claim it, you can backdate your claim for up to four tax years.
- Update your payroll software or contact HMRC directly to initiate the process.
- Any backdated claims will result in a refund or credit against outstanding NIC liabilities, depending on the circumstances.
Managing Your Employment Allowance
Monitoring Throughout the Year:
It’s essential to track how much of the £5,000 allowance has been used. Most payroll software will automatically display the remaining balance, helping you ensure you’re on top of your claims.
If You Become Ineligible:
Should your business exceed the £100,000 NIC threshold or otherwise become ineligible during the tax year, you must stop claiming the allowance immediately.
- Update your payroll software to reflect your ineligibility.
- Notify HMRC by submitting a revised Employer Payment Summary (EPS) to avoid penalties or overpayment.
Why Employment Allowance Matters
Reducing NIC liabilities can free up significant resources for your business. These savings can be reinvested in hiring new staff, training existing employees, or expanding operations. Additionally, effective management of Employment Allowance can help businesses meet critical tax deadlines, such as PAYE, VAT, and Corporation Tax payments, without cash flow interruptions.
FAQs
What Is Employment Allowance?
Employment Allowance allows eligible UK businesses to reduce their Class 1 National Insurance bill by up to £5,000 annually, easing the cost of employment.
Who Can Claim It?
Businesses with NIC liabilities below £100,000 in the previous tax year, as well as charities and certain public organisations, are eligible.
How Do I Claim Employment Allowance?
You can claim through payroll software like QuickBooks or Xero, or via HMRC’s Basic PAYE Tools. Once claimed, the allowance is automatically applied throughout the tax year.
Can I Claim for Previous Years?
Yes, eligible businesses can backdate claims for up to four tax years. Contact HMRC or update your payroll software to make a claim.
What Happens If I Become Ineligible?
If your NIC liability exceeds £100,000 or your circumstances change, you must stop claiming the allowance immediately and notify HMRC.
At Cutts & Co Accountancy, we can help you navigate Employment Allowance and other tax-saving opportunities. Contact us today for tailored advice on managing your business’s payroll and NICs efficiently.
