In 2014, the government implemented the Employment Allowance in order to provide small businesses with some relief on staffing costs. This allowance can significantly benefit your business if you’re looking to grow. Let’s take a closer look at what the Employment Allowance is and whether your firm qualifies.
What is the Employment Allowance?
It’s important to note that the allowance is given per business, not per employee. The Employment Allowance allows employers to reduce their National Insurance liability by up to £5,000 per tax year. This means that each time you run your payroll or until the end of the tax year, you’ll have to pay less Employers’ Class 1 National Insurance. You can only claim against Class 1 National Insurance if your allowance is up to £5,000. The good news is that you can still claim if your liability was less than £5,000 last year. In fact, you can claim Employment Allowance for the previous four years, dating back to the 2018/19 tax year, but the maximum thresholds were lower at that time.
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 must collect and pay taxes to HMRC in relation to that employment.
Am I eligible?
You can claim Employment Allowance if you’re a business or charity, including community amateur sports clubs, and 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 that 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 as well. “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 percent of parental pay for your employees, such as maternity and adoption leave,” explains Mark Hopkins, Finance Assistant at Balance. Remember that you don’t need to take Employment Allowance into account when calculating the threshold for Small Employers’ Relief. Also, keep in mind that Employment Allowance now counts towards de minimis state aid for certain businesses, so it’s essential to take that into consideration from April 2020.
If you pay off-payroll workers, also known as “deemed payments,” those Class 1 liabilities won’t count towards the £100,000 threshold. Additionally, you can’t claim if you’re a public body or if your business does more than half of its work in the public sector. You won’t be able to claim 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. Employees within the IR35 “off-payroll working rules” can’t be included in your claim. Workers employed for personal, household, and domestic work, such as cleaners or gardeners, won’t count either, except for care or support workers.
How do I claim Employment Allowance?
Claiming Employment Allowance is not automatic, but it is relatively simple. “It will need to be ‘re-applied’ for every tax year, as eligibility criteria may change or be updated,” says Linda Wright, Operations Manager at PayEscape. The method you use to apply depends on whether you have your own payroll software or use HMRC’s Basic PAYE tools. If you have your own payroll software, enter “Yes” in the Employment Allowance Indicator field when sending an Employment Payment Summary (EPS) to HMRC. If your payroll software doesn’t have this field, you can use basic PAYE tools. If you use HMRC’s Basic PAYE tools, follow these steps:
1. Choose the correct name in the ‘Employer’ menu on the homepage
2. Select ‘change employer details’
3. Click ‘Yes’ in the Employment Allowance Indicator field
4. 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’
5. Send your EPS as usual
You’re not automatically entitled to the full amount; it depends on your employees’ NICs.
How do I stop my claim?
If you are no longer eligible, you can stop your claim by selecting ‘No’ in the ‘Employment Allowance indicator’ field in your next EPS. However, you should not select ‘No’ simply because you have reached the £5,000 limit before the end of the tax year. This does not make you ineligible; it just means you have reached your limit for that tax year. Additionally, if you are no longer employing anyone, the allowance will stop at the end of the tax year. If you stop your claim before the end of the tax year, any allowance you’ve been given that year will be removed, and you’ll need to pay any employers’ (secondary) Class 1 National Insurance due.
When do I claim?
You can claim at any point in the tax year. However, keep in mind that the earlier you claim, the sooner you’ll receive your allowance.
When can I start using my allowance?
You can start using your Employment Allowance as soon as you submit your claim. You won’t receive a confirmation letter for your allowance from HMRC. If your claim is rejected, you’ll receive an automated message from HMRC within five working days. You can check 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.