How to claim Employment Allowance

Jan 22, 2024 | Business advice, Business tax

Employment Allowance enables employers to reduce their National Insurance bills, intending to help them invest in their business, hire more employees, etc. 

For the tax year 2023-2024, the Government has made this more attractive by increasing the allowance to up to £5,000. 

This guide provides a detailed overview of how to claim Employment Allowance, ensuring your business can benefit from this effective tax relief.

What is Employment Allowance?

Employment Allowance is a strategic policy designed to bolster the employment landscape. For the tax year 2023 to 2024, the allowance increased from £4,000 to £5,000.

The primary objective of Employment Allowance is to reduce the financial burden of National Insurance contributions (NICs) on employers. By doing so, it achieves several key goals:

  1. Encourages hiring: It acts as a catalyst for employment. With reduced NICs, businesses, especially small and medium enterprises, find it financially more viable to take on additional staff.
  2. Supports business growth: The savings from NICs can be redirected towards other areas of business development, such as expanding operations, investing in training, or improving infrastructure.
  3. Boosts the economy: More hiring lowers unemployment rates and stimulates economic activity. This, in turn, can lead to a healthier overall economic environment.

An example

Imagine a small digital marketing agency with an annual National Insurance liability of £12,000. 

With the Employment Allowance, they can reduce this liability by £5,000, bringing their NICs down to £7,000 for the year.

Eligibility criteria

Eligibility for Employment Allowance extends to most businesses and charities, including community amateur sports clubs and employers of care or support workers. 

However, your previous year’s Class 1 NICs must be less than £100,000. Off-payroll payments to contractors do not count towards this threshold.

Public bodies or businesses undertaking more than half of their work in the public sector are ineligible, with the exception of registered charities. 

Also, limited companies with only one employee who is also a director are not eligible unless they hire more staff during the tax year.

Guide to claiming Employment Allowance

Here’s how to claim Employment Allowance:

Step 1: Verify eligibility

The first step is assessing your organisation’s eligibility for Employment Allowance. 

You need to review your previous year’s Class 1 National Insurance Contributions (NICs) to ensure they were below £100,000. 

Additionally, you should verify that your business doesn’t fall into any of the ineligible categories.

Step 2: Use payroll software

Once eligibility is confirmed, the next step involves your payroll software. This step is pivotal for indicating your claim for Employment Allowance. 

You need to adjust the settings within your payroll software to fill in the ‘Employment Allowance Indicator’ field. 

This action is typically done when you are preparing to send an Employment Payment Summary (EPS) to HMRC. 

If your payroll software does not have an EPS field, HMRC’s Basic PAYE Tools can be utilised as an alternative method.

Step 3: Submit EPS to HMRC

Submitting the EPS to HMRC is a crucial step in the claim process. It’s essential to ensure that your EPS, which indicates your claim, is accurately completed and sent to HMRC. 

This step finalises your intent to claim the allowance and is typically carried out through your payroll software. HMRC’s Basic PAYE Tools should be used when the software lacks an EPS field.

Step 4: Utilise the allowance

After your claim has been submitted, the allowance can be immediately utilised. 

You can start to reduce your NICs with the allowance up to the full £5,000, or until the tax year ends, whichever comes first. 

This is where you’ll see the financial benefits of the Employment Allowance, as it directly reduces your NIC liabilities.

Step 5: Annual renewal

An important aspect of the Employment Allowance is its annual nature. 

Each tax year, you are required to make a new claim. It is advisable to make this claim early in the financial year to maximise the benefits of the allowance throughout the year.

Maintaining clear and accurate records of your NIC contributions and the allowance claimed is imperative. This will be essential for audits and potential inquiries.

Moreover, be aware that the allowance counts towards your de minimis state aid limit. Ensuring that claiming the allowance doesn’t breach these limits is important.

Final thoughts

With the increased Employment Allowance available right now, it’s an excellent time to fully leverage this opportunity. 

By following the steps we’ve overviewed here, you can ensure that your business makes the most of the Employment Allowance, enabling you to re-invest in your business. 

Remember, for specific situations or complex cases, consulting with a financial advisor is advisable.

Contact us at FMA Accountants to learn more about Employment Allowance and other business reliefs. 

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