From April 2022, the Employment Allowance was increased from £4,000 to £5,000 — in no small part due to the hard work of the Federation of Small Businesses on behalf of its members.
This is welcome extra support for smaller employers facing rising costs and an uncertain future.
Here we look at the allowance in detail and explore who is eligible, at a time when easing the financial burden could prove very useful.
What is the Employment Allowance?
The Employment Allowance enables eligible employers to reduce their National Insurance (NI) liability. As of April 2022, this reduction can be up to £5,000. For smaller businesses, employment costs are one of their largest outgoings, so this increase is welcome news.
Essentially you pay a much lower proportion of employers’ Class 1 NI each time your payroll runs, until the allowance is used up or the tax year comes to an end — depending on which comes first. If your liability was actually less than £5,000, you can still claim the allowance.
For all the details on Employers’ Class 1 NI contributions, the rates and thresholds for the current tax year, take a look at GOV.UK.
Is my business eligible to claim?
Here is a rundown of the business types that can make a claim for Employment Allowance, based on the latest criteria:
You will need to be a registered employer
You are a sole trader, limited company or partnership that has employees
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. If you are a company with just one director, take a look at the HMRC guidance on GOV.UK for further information
Your employers’ Class 1 NI liabilities were less than £100,000 in the last tax year
Employment Allowance doesn’t apply to IR35, off-payroll circumstances, so you can’t include off-payroll workers in your calculations
Who isn’t eligible?
There are of course businesses that are excluded from claiming the Employment Allowance. These include:
A business with only one employee paid above the Class 1 NI Secondary Threshold, where that employee is also a director of the company
Self-employed freelancers and contractors, because they don’t pay Class 1 NI
If you employ someone for personal, household or domestic work — unless they are a care or support worker
Where public bodies do more than 50 per cent of your work, in or for the public sector — unless you are a charity. There are some exceptions to this exclusion — you can find out more at GOV.UK
How exactly does the Employment Allowance work?
The £5,000 Employment Allowance applies to your business as a whole and not to individual employees. This means that if your NI bill is £6,000 in total for the tax year, you’ll only need to pay the excess of £1,000.
If your business has more than one payroll, you can only make a claim against one of them.
What about the de minimis state aid rules?
When applying for Employment Allowance, you need to check the de minimis state rules carefully. Basically, if you make or sell goods or services, the allowance counts as de minimis state aid, and there is a limit to how much of this you can have, calculated over a three-year period. You can check the rules and regulations at GOV.UK.
How do you claim Employment Allowance?
There is no fixed time for making your claim. You can do it at any point during the tax year, as part of your Real Time Information (RTI) submission to HMRC. The exact method of claiming depends on whether you have your own dedicated payroll software or need to use HMRC’s Basic PAYE tools.
When using your own payroll software, enter ‘Yes’ in the Employment Allowance indicator field when submitting your Employment Payment Summary (EPS) to HMRC at the start of each tax year.
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 may find that you no longer qualify for the Employment Allowance at some point during the tax year, and if this happens you should to make a resubmission to HMRC, letting them know of the change.
The Employment Allowance — designed to help
The Employment Allowance was originally created as a targeted measure — specifically designed to help smaller businesses. Since then it has been expanded three times, and today can provide significant support during a period marked by inflation, high fuel costs and instability. Once you’ve checked your business is eligible, it would make good sense to apply and reap the benefits.
For more help with your small business needs, you may find it helpful to speak with an accountant. Click below to connect with one today.