Beneficial to entrepreneurs who employ others, the Employment Allowance could be worth up to £5,000 each year against your limited company’s Employers’ National Insurance bill.
To help you work out whether your company could be eligible, let’s examine the rules in a little more detail.
This guide has been updated for the 23/24 tax year.
What is the Employment Allowance?
The Employment Allowance works by reducing the amount of National Insurance that you will pay as a business owner when you run payroll, up until either the allotted £5,000 has been used or the tax year is over (whichever comes first).
Before April 1st, 2022, the limit was £4,000.
It can only be paid against Class 1 National Insurance contributions made by your business (Employers’ NICs), up to the specified amount every tax year (this applies even if you pay a smaller amount than £5,000 per annum).
Who is eligible to claim Employment Allowance?
Saving up to £5,000 per year undoubtedly sounds attractive, but before you get too excited about it, you’d best check that your company is eligible.
Firstly, you will need to be a business or a charity that pays Class 1 National Insurance. Those who employ a support or care worker are included in this category.
However, you will not be eligible to claim the EA if:
- You are the director and sole employee being paid more than the Secondary Threshold. 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?
Assuming you are eligible – you are not a sole director of your company, and your work isn’t caught by IR35 – you will only benefit from this tax break if you actually pay yourself / your co-director(s) / employees salaries which are more than the current Employers’ NIC secondary threshold – £9,100 per year.
Many small companies pay their director(s) low salaries, which will be subject to small amounts of NI, or no NI at all.
You should also ask your accountant what the optimum level of salaries you should pay yourself and your staff during the current tax year.
The EA in practice, during the 23/24 tax year
It may be worth paying your company’s employees £12,570 during the 2023/24 tax year, as the employers’ NICs are offset by the Employment Allowance.
- If you pay the employee £12,570, there is no income tax to pay, as this is covered by the personal allowance.
- The £478.86 in Employers’ NICs is refunded by the Employment Allowance.
- 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.
The EA was introduced to encourage businesses to take on employees, and HMT has made it increasingly difficult for small limited company owners to benefit from this incentive by tightening up the eligibility criteria.
So, we would recommend discussing your company’s eligibility with your accountant, as it may be more prudent overall to pay director/employees £9,100 in 2023/24.
How to claim the Employment Allowance
Assuming that your company falls within one of the categories specified above, you’ll probably be wondering how you can make a claim for Employment Allowance.
To make the claim through your payroll software, you’ll need to 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’ll 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.
From the 2020/21 tax year onwards, your company will need to apply to claim the EA each year; it no longer automatically renews.
When can I claim the Employment Allowance?
If your business is eligible to claim the Employment Allowance, you’re likely wondering how soon you can submit a claim.
Fortunately, these can be made at any time during the tax year, so if you didn’t previously realise that it could benefit you, you can immediately take advantage.
If you find that you’re claiming late and are thus unable to use your allowance against the National Insurance you’ve already paid, you can use the sum in various other ways, through liaising with HMRC to see how they can help.
You might wish to request HMRC:
- Use your unclaimed allowance to pay National Insurance or tax owed at year’s end, such as VAT or Corporation Tax.
- Provide a refund when the tax year is over because you owe nothing.
Can I backdate my Employment Allowance?
Surprisingly, the answer is ‘yes’. According to the official guidance; “You can make a claim for the Employment Allowance up to 4 years after the end of the tax year in which the allowance applies.” You can find more information on this here.
Used wisely, the Employment Allowance is a great way to save your business money and, in doing so, bolster your yearly profits by up to £4,000 in a perfectly legitimate way.
Easy to apply for and simple to understand, it really is worth looking into for anyone acting in the capacity of an employer. Why not check your own eligibility today?