If you’re liable to pay employers’ Class 1 National Insurance, eligible employers can reduce this liability by up to £5,000 per tax year. Below we look at the Employment Allowance rules, who is eligible and what requirements must be met to able to claim.
In this guide for employers, we outline the Employment Allowance eligibility criteria, how to claim and highlight key considerations, such as the rules for connected companies and single-director companies.
What is the Employment Allowance?
The Employment Allowance enables eligible employers to reduce their annual National Insurance liability by up to £5,000 each tax year. Employers’ National Insurance refers to the contributions paid to HMRC by the employer, on top of their employee’s earnings and benefits, and is a cost borne by the employer in addition to the employee’s gross pay.
By law, all employers must pay National Insurance Contributions (NICs) on the salaries paid to their employees to help fund the NHS, the state pension and various benefits, such as statutory sick pay and maternity pay.
The Employment Allowance scheme is designed to support smaller employers with these costs, although this allowance can only be used against employers’ Class 1 NICs. It cannot be used against either Class 1A or Class 1B liabilities. Employers pay Class 1A and 1B NICs on expenses and benefits they give to their employees.
How much is the Employment Allowance for 2023-2024?
For the tax year 6 April 2023, the Employment Allowance limit is £5,000.
Under the Employment Allowance scheme, this means that employers will pay less employers’ Class 1 NICs each time they run payroll until the £5,000 has been used or the tax year ends, whichever happens sooner.
A claim can only be made against an employers’ National Insurance liability up to a maximum of £5,000 each tax year, although an employer can still claim the allowance if their liability was lower than £5,000.
Which organisations are eligible for the Employment Allowance?
An organisation can claim the Employment Allowance if it’s either a business or charity, including community amateur sports clubs, or those employing care or support workers — and the employers’ Class 1 National Insurance liabilities payable were less than £100,000 in the previous tax year. If off-payroll payments are made, known as deemed payments, for example, to contractors, these won’t count towards the £100,000 threshold.
Where there are connected businesses or charities, the total employers’ Class 1 NICs for the group must be less than £100,000. Further, only one business or charity will be entitled to claim the Employment Allowance, to be used against one PAYE scheme only, regardless of how many schemes are in operation. This means that if there is more than one employer PAYE reference, the total employers’ NICs for the combined payrolls must be less than £100,000 in the previous year, where a claim can only be made against one of these payrolls.
Companies will be classed as connected for the purpose of claiming the Employment Allowance if either a company has control of another company, or they’re under the control of the same person or people, for example, companies linked in a group. Equally, charities are connected for Employment Allowance purposes if the same person or connected people control two or more charities, and the charities share the same or substantially similar purpose and activities, or they belong to a group of charities. If a charity controls a trading business, they’re also considered connected for the purposes of Employment Allowance.
Who cannot claim the Employment Allowance?
An employer cannot claim the Employment Allowance if the organisation is either a public body, or a business doing more than half of its work in the public sector, with the exception of registered charities, even if wholly or mainly carrying out functions of a public nature.
If an organisation is carrying out more than 50% of its work in or for the public sector, its functions will be classed as being either wholly or mainly of a public nature and therefore will not be eligible under the Employment Allowance scheme. This includes, for example, NHS services, GP services, managing housing stock owned by or for a local council, refuse collection for a local council, prison services and collecting debt for a government department.
In contrast, an organisation will not be classed as carrying out a function of a public nature if it’s providing security and cleaning services for a public building, such as government or local council offices, or supplying IT services for a government department or local council.
Additionally, an organisation cannot claim the Employment Allowance as a limited company employing only one employee being paid above the Class 1 NIC secondary threshold, and that employee is also a director of the company. However, if circumstances change, such that during the tax year the company has more than one employed earner earning above the secondary threshold, the company can become eligible for the allowance for the whole year.
Certain employees also cannot be included in an Employment Allowance claim, such as someone whose earnings fall within IR35 off-payroll working rules, or someone employed for personal, household or domestic work, unless they’re a care or support worker.
Does the Employment Allowance count under the ‘de minimis state aid’ rules?
If a business makes or sells goods or services, the Employment Allowance will count as ‘de minimis state aid’, with a limit to how much de minimis state aid a business can get. This means that before claiming the Employment Allowance, a business must work out how much aid has been received and if it falls within the de minimis state aid threshold. A business must do this even if it doesn’t make a profit, although the de minimis state aid rules only apply to businesses that make or sell goods or services, where charities, amateur sports clubs or those who employ care workers do not need to take these rules into account.
Where applicable, the Employment Allowance counts towards the total de minimis state aid that a business is allowed to get over a period of three years. The relevant de minimis state aid thresholds are different for each industry sector and are calculated in euros:
- Agriculture products sector: €20,000
- Fisheries and aquaculture sector: €30,000
- Road freight transport sector: €100,000
- Industrial sector/other: €200,000.
To calculate whether a business is within the de minimis state aid threshold, it must check whether any de minimis state aid has been received. If so, the business should have been notified of this in writing. The total amount of de minimis state aid received or allocated for the current and past two tax years must be added to the full amount of Employment Allowance for the year in which a claim is being made, and converted to euros using the exchange rate for the end of the previous tax year. If the total falls below the de minimis state aid threshold for the relevant sector, the business will be eligible to claim.
If the company is a connected company, the total de minimis state aid for all companies within the group must be below the de minimis state aid threshold, although the rules are different if a business covers more than one sector.
How do you claim the Employment Allowance?
The way in which an employer can claim the Employment Allowance will depend on whether the business uses its own payroll software or HMRC’s Basic PAYE tools.
To claim through in-house software, ‘yes’ should be put into the ‘Employment Allowance Indicator’ field when sending an Employment Payment Summary (EPS) to HMRC. If the employer’s payroll software doesn’t have an EPS field, Basic PAYE Tools can be used instead. The employer’s name will first need to be selected on the employer menu, followed by ‘Change employer details’ and choosing ‘Yes’ in the ‘Employment Allowance Indicator’ section.
The applicable business sector will need to be selected under the de minimis state aid rules, where most businesses will need to select the ‘Industrial/other’ category. If the business doesn’t make or sell goods or services, the option ‘State aid rules do not apply’, should be selected. The EPS should then be submitted to HMRC as normal.
If the business stops being eligible for the Employment Allowance, ‘No’ should be selected in the ‘Employment Allowance Indicator’ field in the next EPS. However, this field should not be selected because the business has reached the £5,000 limit before the end of the tax year, as this doesn’t make the business ineligible and if a claim is stopped prematurely, any allowance that has been given that year will be removed. Equally, if the business has stopped employing anybody, ‘No’ should not be selected, where the allowance will stop at the end of the tax year.
An employer can begin using its’ Employment Allowance as soon as a claim has been submitted. HMRC will not send a confirmation letter, but if a claim is rejected under the scheme, the business will receive an automated message from HMRC within five working days.
Is there a deadline to claim the Employment Allowance?
A claim for the Employment Allowance must be made every tax year. A claim can be made at any time during that year, although the earlier a claim is submitted, the sooner the employer will benefit from the allowance. If a claim is made late, and the employer has not used their Employment Allowance for the year, a request will need to be made to HMRC to either:
- use any unclaimed allowance to pay any tax or National Insurance owed at the end of the tax year, including VAT and Corporation Tax if nothing is owed on the PAYE bill
- provide a refund after the end of the tax year, if nothing is owed.
An employer can see how much allowance has been used in their HMRC online account.
Can you claim Employment Allowance for previous years?
The Employment Allowance can be claimed for the previous four tax years dating back to the 2018-19 tax year, although some of the rules for claiming are different.
For the tax years 2018 to 2020, the amount of employers’ Class 1 National Insurance liability, or how much de minimis state aid was received, is of no relevance. This is because the employers’ Class 1 National Insurance and de minimis state aid thresholds do not apply. For the years between 2018 to 2020, the Employment Allowance was set at £3,000 for each year, and for the years between 2020 to 2022, the allowance was set at £4,000.
Employment allowance FAQs
What Employment Allowance means?
Employment Allowance enables eligible employers to reduce their annual National Insurance liability by up to £5,000. Employers’ National Insurance refers to the contributions paid to HMRC by the employer, on top of their employee’s earnings and benefits.
How do I know if I am eligible for Employment Allowance?
An organisation can claim Employment Allowance if it’s either a business or charity, and the employers’ Class 1 National Insurance liabilities payable by that organisation were less than £100,000 in the previous tax year.
When can you not claim Employment Allowance?
You cannot claim Employment Allowance if you’re a business doing more than half your work in the public sector, or a company with only one employee who is both a company director and paid above the Class 1 secondary threshold.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.