Pay less National Insurance
The Employment Allowance is a well-established, but not very well publicised, HMRC scheme that allows most businesses that pay Employers’ National Insurance to significantly reduce their bills.
Employers pay Class 1 National Insurance at a rate of 15.05% on all employee earnings above what is known as the secondary threshold, currently £758 per month.
It adds significantly to the cost of offering employment and has, in the past, been referred to as a tax on jobs.
The Employment Allowance helps reduce that cost. There are some eligibility criteria, but typically if your business employs staff and pays less than £100,000 in Class 1 National Insurance each year, then your business will probably be eligible.
The allowance is worth up to £5,000 in the current tax year and can be carried back up to four years (so currently back to the 2018/19 tax year), although the available allowance was lower for previous years.
All in all, what it means is that any eligible business that has not been claiming their Employment Allowance could claim up to £14,000 back from HMRC, and that can be set against pretty much any business-related tax, not just payroll.
The Employment Allowance is available to businesses, charities and community amateur sports clubs, provided that their Employer's National Insurance (NI) liability (Class 1) was less than £100,000 in the previous tax year.
If your business is part of a group, then the NI liability for the entire group needs to be less than £100,000 per year.
The Employment Allowance is classed as ‘de minimis state aid’ so if your business is receiving (or has received) support or payments that are classed as state aid, then you will need to ensure that you are within the allowable limits.
Typically, state aid de minimis limits (over three years) are:
- Agricultural products sector - €20,000
- Fisheries and aquaculture sector - €30,000
- Road freight transport sector - €100,000
- Industrial sector / other - €200,000
This doesn’t mean that you cannot claim if your business has received state aid, just that the Employment Allowance claim may be reduced.
Public bodies and businesses earning more than 50% of their turnover from the public sector are also not eligible - although special rules apply to charities.
Also, critically, you cannot claim if both of the following apply:
- you’re a company with only one employee paid above the Class 1 National Insurance secondary threshold
- the employee is also a director of the company
What if I’m late claiming?
As mentioned above, you can backdate your claim for up to four years, so currently back to the 2018/19 tax year.
The allowance is £5,000 for this current tax year but different rates applied previously:
- £4,000 per year between 6 April 2020 and 5 April 2022
- £3,000 per year between 6 April 2018 and 5 April 2020
And remember, this doesn’t mean that you have to pay this amount of Employers National Insurance - the above is simply the most you can claim.
So there is a maximum of £14,000 in backdated allowance available for eligible businesses that have not yet claimed
If you claim late and do not use your full Employment Allowance against Class 1 National Insurance, you can request that the unclaimed allowance is offset against VAT and Corporation Tax liabilities if you do not owe anything on your PAYE bill.
It is worth noting that you can only backdate any claim once, and that must be when you make your first claim. You are then obliged to claim annually.
After you’ve claimed
If your claim is unsuccessful then HMRC will notify you within 5 working days of the date that you submitted your claim, but beyond that, you are free to start using your Employment Allowance immediately.
HMRC will not send confirmation that your claim has been accepted, they will only notify you if it is not.
You may also need to advise HMRC if your Class 1 National Insurance contributions then exceed £100,000 in any given year or if what is referred to as ‘deemed payments’ take you over that limit.