Payroll

By Devila Rabadia

01 April 2024

Devila Rabadia executive manager payroll

St Albans office

The employment allowance was introduced in April 2014 to help employers grow and to hire new staff.

If you are an eligible employer, the allowance can be used to reduce employer national insurance costs. You can claim at any time in the tax year but the sooner you claim the sooner you save.

What is the employment allowance?

The Employment Allowance, a government initiative applicable for the 2023/24 tax year, enables eligible employers to reduce their National Insurance liability by up to £5,000.

This programme aims to provide support for smaller businesses by allowing them to claim a reduction in employers’ Class 1 National Insurance during payroll processing until either the full £5,000 allowance is utilised or the tax year concludes, whichever happens first.

Even if the employer’s liability is below £5,000, a claim can still be made. Notably, the £5,000 Employment Allowance pertains to each connected business rather than each employee and can be applied to only one connected payroll if there are several businesses in a group.

It is crucial to note that any amount exceeding the £5,000 limit must be settled by the business with HMRC. For instance, if the business’ NI bill is £5,500, only the excess of £500 needs to be paid.

Am I eligible to claim?

To qualify for the Employment Allowance, you must:

Be registered as an employer.
Operate as a business or charity
Have employers’ Class 1 National Insurance liabilities totalling less than £100,000 in the previous tax year.
Have two or more directors who earn more than the secondary threshold for Class 1 National Insurance contributions if you are a limited company employing only directors.

It’s important to note that freelance sole traders and contractors are ineligible for the Employment Allowance as they don’t pay Class 1 National Insurance.

Additionally, claims cannot be made for off-payroll workers (IR35) or individuals hired for personal work, such as childminders or gardeners, except for care or support workers.

Public bodies and businesses conducting over 50% of their work in the public sector are also ineligible for claims unless they are a charity.

How do you claim the employment allowance?

You have the flexibility to claim the Employment Allowance at any point throughout the tax year by incorporating it into the Real Time Information (RTI) submission made to HMRC as part of your payroll procedures.

The claim is made by submitting an Employer Payment Summary (EPS) to HMRC with the appropriate fields populated. Once your claim has been made, you can begin using your allowance to offset employer Class 1 National Insurance due.

What are the benefits of the employment allowance?

The Employment Allowance in the UK provides several benefits for eligible employers. Some of the key advantages include:

Reduced National Insurance contributions (NICs):

The primary benefit is a reduction in the employer’s Class 1 National Insurance liability. Employers can claim up to £5,000 to offset their NICs.

Cost savings for employers:

The allowance helps smaller businesses save on employment costs by lowering their National Insurance contributions. This can be particularly beneficial for businesses with tight budgets.

Support for businesses with limited resources:

The Employment Allowance is designed to support small and medium-sized enterprises (SMEs) by providing financial relief, allowing them to allocate resources to other areas of their operations.

Flexibility in claiming:

Businesses can claim the Employment Allowance at any point during the tax year, providing flexibility in managing their financial resources.

Job creation:

By reducing the cost of employing workers, the Employment Allowance may encourage businesses to hire more employees, contributing to job creation and economic growth.

Why might an employer be ineligible for the employment allowance?

An employer in the UK may be ineligible for the Employment Allowance if:

Their Class 1 National Insurance Contributions (NICs) liability surpasses a specified threshold, typically set at £100,000 in the preceding tax year.
Single-director limited companies lacking additional employees or those with directors earning below the secondary threshold for Class 1 NICs may not qualify.
Public bodies and businesses conducting over 50% of their work in the public sector are generally excluded unless they are charities.
Freelance sole traders, contractors, and certain workers like off-payroll workers or those hired for personal work may also be ineligible.
Employers must be registered, provide accurate information, and comply with tax regulations to claim the allowance.

Significant changes were introduced from 6th April 2020 resulting in the need to check and claim each tax year. Claims are made by submitting an Employer Payment Summary (EPS) to HMRC. It was previously a flat rate regardless of employer size. The government decided to target the allowance at smaller businesses. Therefore, if the secondary national insurance for the previous tax year was over £100,000 or a business exceeds the State Aid ceiling for its sector, they are no longer eligible.

The allowance changed in 2020 from £3,000 to £4,000 and a further increase from April 2022 now takes the allowance to £5,000.

With only a few tax months remaining, it is a good opportunity to review and check your eligibility. Past years can be claimed for, but claims are limited to the previous 4 years.

Eligibility is subject to a range of considerations which include, being a service company; being a director and a sole employee; the presence of connected companies; and being a recipient of state aid within the previous two years. This may sound complex, but we have a simple eligibility assessment process that we can guide you through.

Make a note to check every April as your circumstances could change which means you either become eligible or ineligible.

Get in touch

Please contact Devila Rabadia or Pat Strods if you would like help determining your eligibility for the employment allowance or alternatively provide your contact details below and we will respond.