Being a small business means needing to keep track of your finances, including what taxes you owe, otherwise, you could end up with a nasty surprise in the shape of a huge bill for unpaid taxes.
It’s also important to keep an eye out for opportunities to save yourself some money on your taxes through schemes designed to help small businesses like yours. You can find out more about these with our guide to small business tax relief schemes.
One such scheme is Employment Allowance, which is also known as National Insurance Relief, because it helps small businesses make savings on their National Insurance payments. But what is Employment Allowance?
Our guide has everything you need to know about Employment Allowance, including eligibility and how to claim for it.
What is Employment Allowance?
Employment Allowance is a scheme that allows eligible businesses to reduce their annual National Insurance bill, however, it only applies to smaller businesses. The support is available to reduce the amount of money the business spends on its contributions to its employees’ Class 1 NI liabilities.
National Insurance is paid by both employees and employers and you can read more about how this works in our small and medium business guide to National Insurance.
These employment costs can be a challenge for smaller businesses to cover, especially as they grow, so the Employment Allowance was designed to ease these costs. It has so far been expanded three times to expand its reach.
How much is employment support allowance?
The UK government’s Employment Allowance scheme enables eligible employers to reduce their National Insurance liability by up to £5,000 for the 2022/23 tax year. The limit had previously been £4,000 but it was increased in the 2022 Spring Statement.
This allowance applies to the business as a whole rather than individual employees and can only be claimed against one payroll within the business. It works by allowing businesses to claim up to £5,000 in a single tax year so they can pay less NI contributions each time they run their payroll until they have spent the £5,000 (or until the end of the tax year).
So, if your business has an annual Class 1 National Insurance contribution liability of £5,500 and you claim the full allowance, your liability would drop to just £500 and this would only become payable once the full allowance has been used up.
Who can claim Employment Allowance?
You can claim Employment Allowance if you are a business or a charity and had employers’ Class 1 National Insurance liabilities of less than £100,000 in the previous tax year. This limit is to ensure that the support is targeted at smaller businesses.
If you are part of a group of charities or companies, you can still claim if the total Class 1 NI liabilities are still below £100,000 and only one company or charity in the group can claim the £5,000 allowance, rather than spreading it across all of them.
Equally, while Employment Allowance can only be used for one payroll within a company, you are only eligible if all combined payrolls amount to a liability of less than £100,000.
If you work with freelancers and pay them ‘off-payroll’ through deemed payments, these will not count towards the £100,000 limit. If you are a sole trader, freelancer, or contractor, you also can’t claim Employment Allowance.
Employment Allowance exemptions
Another exemption is where ‘de minimis state aid’ (which means financial support from the government) limits apply to your business.
This would potentially be the case if your business is in Northern Ireland or you make or sell goods or wholesale electricity. Businesses that this applies to will have a limit to how much de minimis state aid they can get in a three-year period. So you would need to work out how much of this you have received in the previous three years to see if you would be eligible for Employment Allowance.
You cannot claim Employment Allowance if you are a public body or a business with more than half of its work in the public sector, or if you have only one employee paid above the Class 1 NI secondary threshold who is also a director.
When can I claim Employment Allowance?
You can claim Employment Allowance every tax year and while you can claim at any point in the tax year, the sooner you claim, the sooner you can benefit from it, making it also less likely that you might run out of time before using the full allowance.
If you do claim late and don’t use the allowance, you can ask HMRC to use your unclaimed allowance to pay any remaining NI or tax owed or to give you a refund if you don’t owe any tax.
It’s also possible to claim for the previous four tax years, but only for the allowances that were given for those years, which was £3,000 per year between 2016 and 2020, and £4,000 per year between 2020 and 2022. You will also need all of the appropriate paperwork for these tax years in order to make a successful claim.
How can I claim Employment Allowance?
To claim Employment Allowance, you can either use your own payroll software or the PAYE tools from HMRC and it’s as simple as selecting ‘Yes’ in the Employment Allowance indicator field in the Employer Details section. To stop claiming it, you just need to select ‘No’.
If you are using your own payroll software, the process should be equally simple, with a field to fill in to say that you would like to start claiming Employment Allowance.
Once you have made a claim you will not receive a confirmation letter but would receive notification within five working days if your claim has been rejected. Otherwise, you are able to start using the Employment Allowance as soon as you have submitted your claim.
You can get more information about eligibility and how to claim from the gov.uk website’s Employment Allowance pages.