The Employment Allowance is a type of relief available to some employers to help reduce the cost of their National Insurance contributions by up to £5,000 each year. We’ve prepared this guide to explain which employers can use the Employment Allowance, and how the process works. If you’re brand new to being an employer, we also have a guide to help first time employers get started.
Let’s start off with the basics. National Insurance is based on how much an employee earns, and is made up of two payments: one from the employee and one from you, the employer.
Employees pay Class 1 (Primary) National Insurance if they are under State Pension age and earn more than the Primary Threshold (in 2023/24 this is £12,570).
Employers pay Class 1 (Secondary) National Insurance on an employee’s earnings above the Secondary Threshold, which in 2023/24 is £175 per week (or £9,100 a year).
As the employer, it’s you who manages Class 1 National Insurance. You’ll deduct the employee’s contribution from their wages before it lands in their bank account. This deduction, along with your contribution for employer’s NI, is paid on to HMRC.
This is where it gets really interesting as the Employment Allowance could shave a significant amount off your outgoings. The Employment Allowance only applies to the employer’s contribution towards National Insurance. The amount that your employee contributes doesn’t change and isn’t impacted.
Providing you are eligible (more on that below), you could save up to £5,000 per tax year in relief. It means that each time you run payroll you’ll pay less employer’s NI, until you use up the allowance, or start again in a new tax year.
Once you’ve used up your full £5,000 allowance in a tax year, you’ll need to start paying any remaining employer contributions towards National Insurance.
You don’t need to be paying more than £5,000 to qualify, either. Even if your bill for employer’s NI is less than £5,000 in a year, you can still benefit from the Employment Allowance.
Am I eligible for the Employment Allowance?
There are three basic criteria to qualify for claiming the Employment Allowance.
Do you run a business or a charity?
Do you have at least one employee (or at least 2 directors if you don’t have any employees) earning more than the Class 1 NI Secondary Threshold?
Is your bill for employer’s NI from the previous tax year less than £100,000?
Check, check, check? If you’ve met all three criteria, there’s more to learn and you’re in the right place. Read on!
Are there any exceptions?
You can probably guess that qualifying for the Employment Allowance isn’t quite as straightforward as that. Remember that one employee you must have in order to be eligible?
That employee can’t be both a director of the business and the only employee who’s paid more than the Secondary Threshold for National Insurance. This is the amount that employees can earn before their employers must start contributing towards their National Insurance. In 2023/24 the secondary threshold amount is £758 per month.
In other words, if you employ one person, and that person is a director of the business, then you can’t claim Employment Allowance.
It also means you’re unable to claim the Employment Allowance if you employ several people, but the director is the only one paid above the National Insurance Secondary Threshold.
I make or sell goods or services, are the rules different?
Yes! This is where state aid rules come into play. The Employment Allowance is counted as part of the ‘de minimis state aid’ for those that make or sell goods or services. Depending on your sector, there is a limit to the amount of state aid you can receive over a three-year period.
To understand if you’re eligible to claim Employment Allowance you will need to:
Check whether you’re within the de minimis state threshold
And also calculate how much state aid you’ve received
As state aid is part of an EU initiative to ensure fair competition, the threshold is calculated in Euros. Sectors are split into four key areas:
Simply tick the box that indicates you will be claiming the Employment Allowance. If you make or sell goods or services, you’ll also need to indicate that state aid rules apply. Select the relevant business sector, even if you don’t make a profit.
When can I make a claim?
The Employment Allowance is allocated each tax year, so you’ll need to claim for every tax year that you’re eligible for the relief. You can apply at any time during the tax year but the sooner you get your application in, the sooner you’ll get the allowance.
Help! I’m late making a claim
Don’t panic. You haven’t missed out. It just means that the process for claiming your Employment Allowance is slightly different. You can ask HMRC to either:
Use your unclaimed allowance to pay any outstanding tax bills or National Insurance, or;
Refund you after the end of the tax year, if you don’t owe anything.
I’ve submitted my claim for the Employment Allowance – what next?
You can start using your Employment Allowance as soon as you submit your claim. There’s no need to wait for confirmation from HMRC, and there is no formal letter to give you the green light.
The only time HMRC will contact your regarding your application is if they reject your claim. In that instance, you’ll receive a message from HMRC within 5 working days of making a submission.
Is there a deadline to claiming the Employment Allowance?
There is currently a 4-year limit in place, so if you didn’t know about the Employment Allowance, or just didn’t find the time, you can still claim for the previous 4 tax years.
Be aware though, that there are different rules for historical claims! We advise consulting with an accountant on this one.
Stay up to date
Spend time familiarising yourself with the eligibility criteria. If your circumstances change, for example you change the nature of your business or you reduce the number of employees, make sure you’re still eligible to claim the Employment Allowance.