Can I claim Employment Allowance for my business?

The Employment Allowance is a means for SMEs to reduce the tax burden of employing staff at critical points in their growth and help avoid cash flow crises, via a reduction in National Insurance Contributions (NICs).

What is the Employment Allowance?

The Employment Allowance is a Government initiative that allows eligible businesses to reduce their annual employer NIC liability.

Currently, NICs can be reduced by up to £5,000.

It allows employers to claim a reduction in Class 1 NICs each time they run payroll until the end of the tax year, or until the full amount has been claimed.

Is my business eligible?

Only certain businesses are eligible to claim Employment Allowance.

Most critically, your business must pay some amount of Class 1 National Insurance, which means sole traders are generally not eligible.

You can claim if you are a business, charity or community sports club which:

  • Employs staff and pays Class 1 NICs on your employees’ earnings
  • Has Class 1 NICs of less than £100,000
  • Is part of a group with total Class 1 NICs of less than £100,000

Certain payments, such as off-payroll costs to contractors, are classed as ‘deemed payments’ and therefore do not count towards your £100,000 threshold.

You are allowed to claim the allowance even if your total NIC bill is less than £5,000, although you will only be able to claim up to the total of your bill.

If your business is in Northern Ireland and you make or sell goods, you’ll need to check that you’re within your ‘de minimis state aid’ allowance.

How to claim Employment Allowance

Claiming the Employment Allowance is a relatively straightforward process, depending on the payroll system that you use.

If you use the Basic PAYE Tools from HM Revenue & Customs (HMRC), you’ll apply when you send your Employer Payment Summary (EPS) by:

  • Selecting the correct ‘Employer’ name on the homepage
  • Selecting ‘Change employer details’
  • Selecting ‘Yes’ in the ‘Employment Allowance indicator’ field

If you use your own software, you’ll follow the same process as indicated by your provider.

Backdating Employment Allowance claims

Up to a certain point, you are allowed to claim Employment Allowance on previous tax years.

Currently, you can claim for the previous four tax years, back to the 2018/19 year, at the rate of Allowance set in that year.

Employment Allowance was £3,000 for each year between 2016/17 and 2019/2020, rising to £4,000 in the 2020/21 and 2021/22 financial years.

To claim for the years 2018/19 and 2019/20, you can claim Employment Allowance regardless of how much your Class 1 NICs were or how much de minimis state aid you received.

Why claim Employment Allowance?

Employment Allowance is one of the ways that HMRC aims to support SMEs and enhance growth.

It isn’t compulsory for businesses to claim it, but there are a number of ways that it can support your overall financial health and support your long-term business plan:

  • Tax savings – If you’re operating on a tighter budget, additional funds provide some much-needed breathing room and a buffer against unexpected costs.
  • Cash flow – Additional funds means that you can improve your cash flow and invest in business development or expansion.
  • Motivating employment – Ultimately, this allowance is designed to encourage employment by innovative new businesses, supporting both your business and your employees.

Claiming Employment Allowance – We can help

Employment Allowance is invaluable to SMEs looking to save on the tax cost of employing staff. While it is fairly straightforward to claim, we’re here to help to save you time and resources.

Our team understands the intricacies of running payroll and making your business as tax-efficient as possible.

We can help you identify your eligibility for Employment Allowance and help you integrate savings into your wider financial planning.

To speak to the experts, please get in touch with us today.