What is Employment Allowance?
Employment Allowance provides a significant reduction in the National Insurance liability for eligible employers. By understanding how to claim and apply this allowance, you can effectively manage and reduce your payroll costs
Employment Allowance is a valuable benefit for eligible employers, allowing them to reduce their annual National Insurance liability. Here’s a comprehensive guide to how it works and how you can take advantage of it.
Key Points of Employment Allowance
Annual Reduction:
Eligible employers can reduce their Class 1 National Insurance liability by up to £5,000 per tax year.
Application:
The allowance is applied each time you run your payroll until the £5,000 limit is reached or the tax year ends, whichever comes first.
Eligibility:
You can claim Employment Allowance even if your total annual National Insurance liability is less than £5,000.
How to Claim Employment Allowance
Eligibility Check:
Ensure your business is eligible. Generally, most businesses and charities that pay employers’ Class 1 National Insurance contributions are eligible, but there are some exceptions.
Payroll Software:
When setting up or running your payroll, indicate in your payroll software that you are claiming the Employment Allowance. Most payroll software will have an option to claim this allowance.
HMRC Notification:
Notify HMRC of your claim for Employment Allowance through your payroll software. This is typically done as part of your regular payroll submission (Full Payment Submission - FPS).
Applying the Allowance
Reducing National Insurance Liability:
Each time you run your payroll, the Employment Allowance will automatically reduce your employers’ Class 1 National Insurance liability until the £5,000 limit is reached.
Example:
If your monthly Class 1 National Insurance liability is £400, the Employment Allowance will cover this amount each month until it reaches the £5,000 cap. This means the allowance will cover your contributions for approximately 12.5 months (£400 x 12.5 = £5,000).
Exceeding £5,000:
Once the £5,000 limit is reached, you will start paying employers’ Class 1 National Insurance contributions as usual.
Important Considerations
Annual Claim:
The Employment Allowance claim needs to be made each tax year.
Ensure that you include the claim in your payroll setup at the beginning of each tax year.
Multiple PAYE Schemes:
If you operate multiple PAYE schemes, you can only claim Employment Allowance against one of them.
De Minimis State Aid Rules:
For some employers, particularly in certain sectors, claiming the Employment Allowance may be considered as de minimis state aid. Make sure your total state aid, including the Employment Allowance, does not exceed the relevant threshold.
Record Keeping:
Keep detailed records of your claims and how the allowance is applied. This is important for compliance and in case of any future audits by HMRC.
Always ensure your eligibility and follow the necessary steps to claim the allowance each tax year, and keep accurate records to support your claim.
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