What is the Employment Allowance and how can it benefit your business?

an image of company director woth the support of an in accountancy accountant applying for employment allowance

The Employment Allowance is a government incentive designed to support businesses by reducing their National Insurance Contributions (NICs). It gives employers the opportunity to save up to £5,000 a year on their NICs bill, making it an attractive option for eligible employers – including sole traders, limited companies, and charities.

In this blog, we’ll break down everything you need to know about the Employment Allowance. We’ll discuss what it is, who is eligible to claim it, and how doing so can benefit your business’ finances.

What is the Employment Allowance?

The Employment Allowance is a tax relief scheme set up by the UK government to help reduce employers’ National Insurance Contributions (NICs) bill. Available to all eligible businesses, regardless of size or sector, the Employment Allowance enables businesses to save up to £5,000 a year in NICs if they claim the allowance.

Who can claim the Employment Allowance?

The Employment Allowance is available to any business or charity, providing they meet certain criteria. You must be an employer and have at least one employee to claim the allowance. This includes sole traders, limited companies, and charities. Plus, your employer NI liabilities (not your total NI bill) for the previous tax year must be less than £100,000 – excluding IR35 contributions.

It’s worth noting that the rules are slightly different if you make or sell goods or services. In this case, the allowance is classed as ‘de minimis state aid’ and there is likely to be a limit to how much you can receive over a three-year period, depending on your sector. You can check your eligibility on the GOV.UK website.

Businesses that can’t claim the Employment Allowance include public sector companies, those with one employee who also happens to be a director, and those whose employees don’t pay Class 1 NICs, such as freelancers.

How to claim the Employment Allowance

Claiming the Employment Allowance is a relatively straightforward process. It is the responsibility of the payroll provider to check and request the Employment Allowance claim through Real Time Information (RTI) submissions of PAYE details to HMRC. This can be done via HMRC’s PAYE tool or through your payroll software at any point during the tax year. If you have several payrolls, you can only claim against one.

Benefits of claiming the Employment Allowance

The obvious benefit of claiming the Employment Allowance is that it can reduce your company’s NICs bill by as much as £5,000 a year. As such, you’ll pay less employers’ Class 1 National Insurance when you run your payroll until either your allowance has been used up or the tax year ends. Remember that you can still claim if your NI liabilities are less than £5,000 a year. Just think what you could do with that extra budget!

How much is the Employment Allowance for 23/24?

As we’ve mentioned throughout this article, the Employment Allowance for the 2023/24 tax year is £5,000. Bear in mind that the Employment Allowance applies to the business as a whole and not individual employees. So, for example, if your NI bill for the year was £5,500 in total, you would only pay the additional £500.

Can I claim for previous years?

Yes. You can claim for previous tax years and backdate the allowance for up to four years. This means that if you’ve not yet claimed Employment Allowance, you could still benefit from the scheme if you act quickly. In order to qualify, you’ll need an employment payment summary (EPS) for each year that you intend to make a claim. Remember, you can only claim for the relevant amount of allowance that was allocated for that tax year.

So, for example, those historical allowance amounts look like this:

  • April 2022 onwards: Up to £5,000
  • 2020-2022: Up to £4,000
  • 2016-2020: Up to £3,000

How often do I have to tell HMRC?

You will need to claim for the Employment Allowance every tax year. You’ll also need to inform HMRC of any changes that may affect your eligibility. If you fail to update them, you could be liable for backdated repayments.

Contact IN Accountancy today.

The Employment Allowance is a useful government incentive that can provide real financial benefits to eligible businesses, especially small to medium-sized enterprises. Understanding the eligibility criteria and knowing how to apply will help to ensure that you maximise its potential advantages. With the right knowledge, this scheme can be an invaluable tool for improving your business’s finances, and IN Accountancy can help you to make the most of it.

Our accountants can help you to assess your business’ eligibility for the Employment Allowance, providing advice and guidance to help you to reduce your NICs bill. For more information or to speak with one of our experts, don’t hesitate to contact us on 0161 456 9666 or email askus@in-accountancy.co.uk for advice.

For more details about the Employment Allowance, take a look at Sarah’s video below from our YouTube channel:

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