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Contents

  1. 1. What is Employment Allowance?
  2. 2. How does Employment Allowance work?
  3. 3. Who can claim Employment Allowance?
  4. 4. When should I claim Employment Allowance?
  5. 5. How to claim Employment Allowance
  6. 6. What happens once your Employment Allowance claim has been submitted?

Employment Allowance: What it is and who can claim it

February 10, 2023
If you’re a small business owner planning your first hire, you might have you heard of Employment Allowance relief.This tax relief is designed specifically to support small employers with their employment costs and could reduce your National Insurance liability by up to £5,000 per year.In this article, we’ll provide a guide to Employee Allowance eligibility, how it works and how your small business can claim it.

What is Employment Allowance?

The Employment Allowance allows eligible employers to reduce their National Insurance contributions (NICs) by up to £5,000 for the 2022/23 tax year.
The allowance was increased from £4,000 to £5,000 in the 2022 Spring Statement in response to the efforts of the Federation of Small Businesses to secure extra help for small firms.

Employment Allowance means you pay a lower proportion of employers’ Class 1 National Insurance contributions each time you run your payroll until either the end of the tax year or the £5,000 allowance is used up – whichever happens first. If your liability is less than £5,000, you can still claim the allowance.
For further guidance on employers’ NICs, as well as the rates and thresholds for the 2022/23 tax year, check out our guide to National Insurance for limited company directors.

How does Employment Allowance work?

It’s important to note that the £5,000 Employment Allowance applies to your business as a whole and not to individual employees. The amount your employee contributes isn’t impacted and won’t change.However, if your business has more than one payroll, you can only make a claim against one of them.For some businesses, Employment Allowance is classified as de minimis state aid, or financial support from the government. As a result, de minimis state aid limits may apply to your business, for example:
    If your business makes or sells goods or wholesale electricityYour business is located in Northern Ireland
You can find out more on de minimis state aid rules at gov.uk.

Who can claim Employment Allowance?

To claim Employment Allowance, your business must meet at least one of the eligibility criteria below:
    You must be a registered employer You must be a sole trader, limited company or partnership that has employees You have a limited company that only employs its directors where 2 or more directors earn more than the secondary threshold for Class 1 NICs Your employer’s Class 1 National Insurance liabilities were less than £100,000 in the last tax year Employment Allowance doesn’t apply to IR35, so you cannot include any off-payroll workers in your calculations as they won’t count towards the £100,000 threshold

Who isn’t eligible to claim Employment Allowance?

If any of the following criteria is applicable to you, you won’t be eligible to claim Employment Allowance:
    Your business has only 1 employee earning above the Class 1 National Insurance Secondary Threshold, where that employee is also a director of the companySelf-employed freelancers and contractors, as you won’t pay Class 1 NICs under this business structureYou employ someone for personal, household or domestic work, unless they are a care or support workerWhere public bodies do more than 50% of your work, either in or for the public sector, unless you are a charity

When should I claim Employment Allowance?

You’ll need to submit a claim for Employment Allowance every tax year that you’re eligible for the relief. You can apply at any time during the tax year, but obviously the sooner you make your claim, the sooner you’ll receive the allowance.If you haven’t claimed for Employment Allowance before but have been an eligible employer for a while, you can claim for the previous 4 tax years.The Employer’s Allowance for previous years is as follows:
    £4,000 each year between 6th April 202 and 5th April 2022£3,000 each year between April 2016 and April 2020
However, it’s important to note that different rules apply for historical claims, so it’s always best to seek advice from an accounting professional before submitting a claim.

If you submit your Employment Allowance claim late

If you don’t submit your Employment Allowance claim in time, the process for claiming your Employment Allowance will be slightly different.You can ask HMRC to either:
    Put your unclaimed allowance towards any outstanding tax bills or your NI bill, orSend you a refund after the end of the tax year, if you don’t owe anything

How to claim Employment Allowance

Once you’ve determined that your business is eligible for employment allowance, you can make a claim as part of your PAYE reporting process, using either:
    HMRC’s basic PAYE tool, or Your own payroll software (such as Ember)
To claim through your payroll software, you simply need to tick ‘Yes’ to indicate you’ll be claiming Employment Allowance the next time you send your Employment Payment Summary (EPS) to HMRC.However, if you make or sell goods or services, you’ll need to indicate that state aid rules apply. To do this, you need to select the relevant business sector, even if you don’t make a profit.
Check out our business owner’s guide to PAYE for more hints and tips on running payroll.

What happens once your Employment Allowance claim has been submitted?

You can start using your Employment Allowance as soon as you submit your claim. You don’t need to wait for any confirmation from HMRC and they won’t send you a formal letter confirming your Employee Allowance eligibility.Should your claim be rejected, then HMRC will contact you within 5 working days of your submission to advise you.
Caroline Wire
Caroline WireFreelance Copywriter

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