Employment Allowance guide for company directors

If you have employees, the Employment Allowance (EA) can reduce your company’s national insurance bill by up to £5,000 each year.

In this guide – updated for 2024/5 – we explain how the EA works in practice, and if your company is eligible

What is the Employment Allowance?

The Employment Allowance reduces the amount of Class 1 Employers’ National Insurance that businesses have to pay by up to £5,000 each tax year.

Your business can claim if its total NI bill was £100,000 or less during the previous tax year. If your business is part of a group, this limit applies to the group as a whole.

It can only be paid against Class 1 NICs, up to the threshold every tax year. This rule applies even if you pay a smaller amount than £5,000 per annum.

This means – of course – you can only benefit if you have employees – and they earn enough for you to pay Employers’ NI.

Can your limited company claim the EA?

The EA is an attractive incentive, but is your limited company eligible to claim it?

Firstly, you need to be a business or a charity that is registered as an employer with HMRC.

However, your company is not eligible if:

• You are the sole director of your company and the only employee earning above the secondary threshold (£9,100 in 2023/24). You can learn more about what this means here.
• You employ someone to perform domestic, personal, or household work, such as a gardener or nanny.
• You are a business or public body performing over half your work within the public sector and are not a charity.
• You are a service company that operates within the IR35 rules.

Will a typical small company director benefit?

If your company can claim the EA, it only benefits if any employees earn above the current employers’ NIC threshold.

This secondary threshold is currently £9,100 per year.

Many small companies pay their director(s) low salaries, which are subject to small amounts of NI, or no NI at all.

The EA in practice, during the 24/25 tax year

£12,570 is a tax-efficient salary for directors during the 2024/25 tax year. The cost of employers’ NICs is offset by the Employment Allowance.

• If the employee earns £12,570, there is no income tax to pay, as this is covered by the personal allowance.
• The EA offsets £478.86 in Employers’ NICs.
• The employee pays no employees’ NICs below the Primary Threshold (£12,570).
• But you save £659.30 in additional Corporation Tax compared to paying a £9,100 salary (no Employers’ NICs are payable below this ‘secondary threshold’).
• So, the company’s overall tax burden is £659.30 per year less (per employee) if it can claim the EA, and pay an employee a £12,570 salary compared to a £9,100 salary.

Don’t include any NI payments made where IR35 applies, as the EA doesn’t cover these costs.

Talk to your accountant as every company’s situation is different

The EA was introduced to encourage businesses to take on new employees.

However, as you can see, the Treasury has made it increasingly difficult for small limited company owners to benefit from this incentive by tightening up the eligibility criteria over time.

Make sure you discuss your company’s eligibility with your accountant. It may be more prudent overall to pay any employee-directors £9,100 in 2023/24.

How to claim the Employment Allowance

To claim via your payroll software, indicate ‘yes’ in the ‘Employment Allowance indicator’ field when you next submit your EPS (Employment Payment Summary) to HMRC.

Alternatively, if you use the Basic PAYE Tools, you need to:

• On the home page, select your name in the ‘Employer’.
• Click on ‘Change employer details’.
• Tick ‘Yes’ in the ‘Employment Allowance indicator’ field.
• Submit your EPS.

The EA is classed as de minimis state aid (government help) if you make or sell goods and services. State aid rules only apply to a small number of businesses in Northern Ireland. In all other cases, select ‘State Aid rules do not apply’.

You need to apply to claim the EA each tax year as it no longer automatically renews.

Can I backdate my Employment Allowance claim?

Yes – you can claim for up to 4 previous tax years. You need to submit a separate EPS for each year in question.

What if my company is no longer eligible to claim the EA?

In the ‘Employment Allowance indicator’ field mentioned above, you need to click ‘No’ if your company no longer meets the eligibility criteria.

Don’t check ‘no’ if you’ve simply used up the EA for the tax year, as your company is still eligible for future years.

If you no longer have any employees, again, don’t select ‘no’, as the EA will automatically expire at the end of the tax year.