What is the Employment Allowance and How Does it Work?

The Employment Allowance enables eligible employers to reduce their National Insurance (NI) liability, potentially by up to thousands of pounds. This can be a great help as employment costs can represent a significant expense for many small businesses. But how do you know if you’re eligible, and how do you make a claim?

What is the Employment Allowance? 

Designed to support smaller businesses with their employment costs, the Employment Allowance is a government scheme that lets eligible employers reduce their National Insurance liability by up to £5,000 for the 2023/24 tax year.

If you employ staff, you’ll have to pay National Insurance Contributions (NICs) on their earnings. With the allowance, however, you simply pay less employers’ Class 1 National Insurance each time you run payroll until the £5,000 has gone or the tax year ends - whichever is sooner. So, if your NI bill is £6,000 in total for the tax year, you’ll only need to pay £1,000. Importantly, you can still claim the allowance if your liability was less than £5,000 a year. 

You can find current rates and thresholds for employers’ NICs on the UK government website.

Is my business eligible to claim Employment Allowance?

You can claim Employment Allowance if you’re a business or charity and your employers’ Class 1 National Insurance liabilities were less than £100,000 in the previous tax year. So long as you’re registered as an employer and pay employer Class 1 NICs, you can claim whether you’re a sole trader, limited company or partnership.

You’re also eligible if you have a limited company that only employs its directors, where two or more directors earn more than the secondary threshold for Class 1 NI contributions. However, limited companies where the director is the only employee paid earnings above the secondary threshold can no longer claim the allowance. The secondary threshold is currently £175 per week.

It’s also worth noting that you can claim Employment Allowance for the previous four tax years dating back to the 2018 to 2019 tax year, although some rules for claiming are different.

Who isn’t eligible? 

In addition to businesses where only the director is paid above the Class 1 NI secondary threshold, several other scenarios would make you ineligible for Employment Allowance.

Self-employed freelancers and contractors cannot claim because they don’t pay Class 1 NI. It also doesn’t apply if you employ someone for personal, household or domestic work — unless they are a care or support worker. 

It should also be noted that if your business has more than one payroll, you can only claim one of them.

How do I claim Employment Allowance?

You need to claim Employment Allowance every tax year. You can claim anytime, but the earlier you claim, the sooner you will get the allowance.

If you claim late and do not use your Employment Allowance against your employers’ Class 1 NI liabilities, you’ll have to ask HMRC to either use any unclaimed allowance at the end of the year to pay any tax or National Insurance you owe (including VAT and Corporation Tax if you do not owe anything on your PAYE bill) or give you a refund after the end of the tax year if you do not owe anything.

The exact method of claiming depends on whether you have your payroll software or need to use HMRC’s Basic PAYE tools. When using your own payroll software, it’s a case of entering ‘Yes’ in the Employment Allowance indicator field when submitting your Employment Payment Summary (EPS) to HMRC at the start of each tax year. 

If you’re using HMRC’s Basic PAYE Tools, select the correct name in the ‘Employer’ menu on the home page, then select ‘Change employer details’ and ‘Yes’ in the ‘Employment Allowance indicator’ field. You’ll then be asked if de minimis state aid rules apply to you. For some businesses, Employment Allowance counts as ‘de minimis state aid’, that is, financial support from the government. There’s a limit as to how much de minimis state aid these businesses can get over three years. If this is exceeded, they won’t be able to claim Employment Allowance. You can check the rules here. Most likely, you’ll be able to answer ‘no’ that state aid rules do not apply, but if they do, you’ll need to select the business sectors that apply to you. It’s then a case of sending your EPS as normal.

To claim the allowance, you will need to submit an EPS every year, and if you qualify but don’t make the submission, you will be liable for NI. You can check how much Employment Allowance you’ve used by looking at your online HMRC account. If you no longer qualify for the Employment Allowance during the tax year, you will need to resubmit to HMRC, letting them know of the change. 

Claiming Employment Allowance for past years

If you’ve missed your Employment Allowance, you can claim for the past four years, although the amount you’re eligible for will differ. For each year between April 2016 and April 2020, the allowance was £3,000 a year, rising to £4,000 for each year between 6 April 2020 and 5 April 2022.