Employment Allowance is a valuable relief that allows eligible UK businesses to reduce their annual National Insurance Contributions (NICs) by up to £5,000. This allowance can help businesses of all sizes manage cash flow more effectively, lowering the overall cost of employment.
In this guide, we’ll explain what Employment Allowance is, who can claim it, how much you can claim, and how to apply for it. At Ryans, we pride ourselves on making complex clear, so let’s break down the details for you.
What is Employment Allowance?
Employment Allowance is a government initiative designed to support small and medium-sized businesses by reducing their NIC liability. Eligible businesses can claim up to £5,000 per year to offset their Class 1 National Insurance bill, making it easier to manage employment costs.
This is particularly helpful for businesses that employ staff, as it reduces one of their largest operating expenses, providing financial relief and supporting future growth.
How Much is Employment Allowance?
Currently, Employment Allowance is capped at £5,000 per year. This means that once your business claims the allowance, it will be applied automatically to reduce your NIC bill. You can benefit from the allowance throughout the tax year until the full amount is used.
If your NIC liability is less than £5,000, the remaining balance will not roll over into the next year, so it’s important to claim and use it within the same tax year.
Employer Allowance Eligibility: Who Can Claim Employment Allowance?
General Eligibility Criteria
To claim Employment Allowance, your business must have had a Class 1 National Insurance liability of less than £100,000 in the previous tax year. This means that small and medium-sized businesses, along with charities and some public organisations, are typically eligible. The aim is to help businesses reduce their employment costs, making it easier to hire and retain staff.
Who Cannot Claim Employment Allowance?
Certain businesses and organisations are excluded from claiming Employment Allowance. For example, companies with only one director and no other employees are ineligible, as are domestic employers (e.g., those hiring nannies or gardeners).
Additionally, businesses that exceeded the £100,000 NIC threshold in the previous tax year cannot claim the allowance. Some public sector employers or those involved in contract work for public sector organisations may also be excluded from eligibility.
How to Claim Employment Allowance
Using Payroll Software to Claim
Claiming Employment Allowance is straightforward if you use payroll software like QuickBooks or Xero. You can also use HMRC’s Basic PAYE Tools. During your payroll setup, you’ll need to indicate that you’re eligible for the allowance.
Once claimed, the £5,000 allowance is automatically applied against your National Insurance Contributions (NICs) each time you run payroll. This continues until the allowance is fully used or the tax year ends.
How to Claim Employment Allowance for Previous Years
If your business was eligible for Employment Allowance in previous years but didn’t claim it, you can still backdate your claim for up to four tax years. To do this, update your payroll software or contact HMRC directly. For backdated claims, you’ll receive a refund or credit toward any outstanding National Insurance liabilities, depending on the amounts owed.
Employment Allowance and UK Tax Deadlines
The Impact of NIC Allowance on Payroll and Tax Deadlines
The Employment Allowance reduces your NIC liability, which directly affects how much you need to pay to HMRC. By reducing your NICs, you can free up cash for other business expenses, making it easier to manage key tax deadlines like PAYE, VAT, and Corporation Tax.
This can help businesses avoid unexpected shortfalls in cash flow. However, it’s essential to maintain accurate payroll records to ensure you’re claiming the correct amount and staying compliant with HMRC regulations.
Managing Your Employer NIC Allowance Effectively
Monitoring Your Allowance Throughout the Year
To effectively manage your Employment Allowance, it’s important to monitor how much of the £5,000 allowance you’ve used throughout the tax year. Most payroll software, such as QuickBooks or Xero, automatically tracks this for you, showing the remaining balance after each payroll run. Keeping an eye on this ensures you don’t overclaim, which could lead to HMRC penalties.
What to Do If You Become Ineligible
If your business becomes ineligible for Employment Allowance during the tax year—for example, if your NIC liability exceeds £100,000—you must stop claiming the allowance immediately. You should notify HMRC by updating your payroll software or submitting a revised Employer Payment Summary (EPS). It’s important to act promptly to avoid penalties or the need to repay the allowance.
Employment Allowance FAQs
What is Employment Allowance?
Employment Allowance is a government incentive allowing eligible UK employers to reduce their annual Class 1 National Insurance liability by up to £5,000. This helps businesses save on employment costs, making it easier to manage cash flow and invest in growth.
Who Can Claim Employment Allowance?
Eligible businesses include those with NIC liabilities below £100,000 in the previous tax year, as well as charities and public organisations under certain conditions.
How Much is Employment Allowance?
The Employment Allowance is up to £5,000 per year. Once claimed, the allowance is applied to your NIC liability until the full amount is used or the tax year ends.
How Do I Claim Employment Allowance?
You can claim Employment Allowance through payroll software such as QuickBooks or Xero, or by using HMRC’s Basic PAYE Tools. Once claimed, it is automatically applied with each payroll run.
Can I Claim Employment Allowance for Previous Years?
Yes, eligible businesses can backdate their claims for up to four previous tax years. This can be done through payroll software or by contacting HMRC directly for support.
What Happens If I Am No Longer Eligible?
If your business becomes ineligible for the allowance (for example, if your NIC liabilities exceed £100,000), you must stop claiming the allowance. This is done by updating your payroll records and informing HMRC via the appropriate channels.