The UK Employment Allowance Explained!

Are you a small business owner who pays a large sum of National insurance each year? Are you aware of a scheme that can reduce this cost for your company? You may be eligible to apply for the Employment Allowance.

What is the Employment Allowance?

The employment allowance scheme was created back in 2014 to help small firms and businesses grow. Initially, it encouraged firms to take on more employees by reducing £2000 from the Employer’s National Insurance bill. In April 2016, the value of the reduction was raised to £3000.

Beginning in April 2020, the allowance benefit has been raised again. Through the most recent scheme, a company can reduce its overall Employer’s National Insurance bill by up to £4,000 each year. (For 2019/2020 fiscal year, the allowance remains at £3000.)

Most Employer NICs are charged at 13.8%. For example, a full-time employee with a salary of £30,000 will incur Employ NICs of roughly £4000. Using the Employment Allowance, this company could completely write off this cost.

The Employment Allowance is claimed via the payroll process. Rather than money being given to the company outright, the allowance itself is ‘claimed’ each month through the firm’s payroll. No employers NICs are payable until the company’s allotted £4,000 allowance has been drained or the tax year comes to an end. 

According to the Government, over 450,000 small firms benefit from the ongoing scheme.

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Who qualifies for Employment Allowance?

With the newest bill introduced in April 2020, the Employment Allowance is available to all businesses with a total National Insurance bill of £100,000 or less during the previous tax year. 

Other restrictions include:

•  The employee cannot be employed for domestic responsibilities (i.e. housecleaner, gardener, etc.)
• The sole director cannot be the only employee paid above the secondary earnings threshold.
• The business cannot be a public body or be doing more than half of its work in the public sector (charity’s excluded)
•  The company can only have deemed employment income under IR35 rules.
• If your business is in a group of companies or has related companies under the same management, only one company in the consortium is eligible for the allowance.

How and when to claim an Employment Allowance?

How you claim your Employment Allowance depends on whether you use your payroll software or the generic HMRC’s Basic PAYE tool.

• If you use your own software: Be sure to select ‘yes’ in the ‘Employment Allowance Indicator’ field the next time you send an Employment Payment Summary to HM Revenue and Customs (HMRC).

If your payroll software does not have this field and you plan to claim Employment Allowance for some time, consider switching to the Basic PAYE Tool. 

•  If you use the Basic PAYE Tool, follow the step by step instructions laid out here.

Be mindful that you need to claim Employment Allowance every tax year. The earlier you claim, the sooner you will get your allowance. You can claim Employment Allowance for the previous four tax years, dating back to the 2016/2017 tax year. To claim for past years, thresholds for employers’ Class 1 National Insurance and de minimis state aid do not apply. 

You can begin using your Employment Allowance as soon as you submit your claim. There is NO confirmation letter for a successful Employment Allowance application. If your claim is rejected, you will receive an automated message from HMRC within five business days. 

Takeaway

If you are a small firm owner trying to grow your business, claim your Employment Allowance today! The scheme was devised to help small businesses thrive and grow. Taking full advantage of the allowance may give you the financial freedom you need to hire the best employees for the job. 

If you need assistance with any employment or business-related issues, please contact one of our lawyers on Qredible.co.uk:

• Employment lawyers
• Commercial/Business lawyers