About the author: Emily Coltman, FCA is the chief accountant for FreeAgent, who make online accounting software for small businesses and freelancers.
How the Employment Allowance could save your business £3,000 a year
The Employment Allowance was first introduced in 2014. It originally offered a £2,000 reduction in employer’s National Insurance contributions for most employers, including single-person limited companies. On 6th April 2016, this changed. The reduction in employer’s National Insurance contributions is now £3,000 and company directors who are the sole employee of their company are no longer eligible. The information in this document reflects the current guidance from HMRC.
What is the Employment Allowance?
The Employment Allowance is a reduction in employer’s National Insurance (NI) contributions of up to £3,000 per year, designed to benefit some small business owners who employ staff. The Employment Allowance does not apply to Employee’s National Insurance.
Do I qualify for the Employment Allowance?
- The Employment Allowance applies to sole traders, limited companies and/or partnerships who employ staff.
- The Employment Allowance applies to limited companies that employ staff members who are not directors. It also applies to limited companies that only employ directors, as long as there are two or more directors who earn more than the Secondary Threshold for Class 1 National Insurance contributions. Further information is available in HMRC’s guidance for single-company directors.
- The Employment Allowance does not apply if your business is a single-person limited company and you are the only employee.
- The Employment Allowance does not apply to sole traders or partnerships who do not employ any staff.
- If you are operating under IR35, the Employment Allowance does not apply to the employer’s National Insurance due on the deemed payment you make.
There are a number of exceptions listed below, so read on to check that you still qualify.
Does HMRC consider me an employer?
HMRC considers you an employer if you meet any of the following criteria:
- You’re paying an employee at or above the PAYE threshold.
- You’re paying the employee at or above the National Insurance Lower Earnings Limit.
- The employee already has another job.
- The employee is receiving a state, company or occupational pension.
- You’re providing the employee with employee benefits.
- If you fall within these criteria and haven’t already registered, you should register as an employer. Here are details from HMRC about how to register.
Businesses who do not qualify
Your business does not qualify for the Employment Allowance if:
- Your business is a single-person limited company and you are the only employee.
- Your business only employs company directors and doesn’t have two or more directors who earn above the secondary threshold.
- Your staff carries out personal, household or domestic work. For example, the Employment Allowance would not apply to staff employed as au pairs, gardeners or chauffeurs.
- You have more than one PAYE scheme running, or you have connected companies. In which case you can only claim for one. For example, if you have two different schemes that you use in different departments of your business, you can only claim the allowance for one scheme.
- Your business is a public body, or does more than half of its work in the public sector. However, your business does still qualify if you’re providing security or cleaning services for a public building, or if you supply IT services for a government department or council.
Once I qualify, will I always qualify for the allowance?
Qualification for the Employment Allowance is not a one-time thing; it can be removed if you no longer meet the qualifying criteria even part way through the year. If you cease to qualify part way through a tax year, you will need to pay back any claimed allowance for that tax year.
A printing business qualifies for the allowance at the beginning of their tax year in April and claims £1,000 by reducing their Employer’s NI contributions for April to August. In September, they take on a big public service contract that represents over 50% of their business.
In this example, the printing business would need to stop claiming the allowance in their September payroll, and would also need to pay the £1,000 of Employer’s NI back to HMRC.
How do I claim the Employment Allowance?
You claim the Employment Allowance as part of your Real Time Information (RTI) submission to HMRC by paying less employer’s National Insurance than you would otherwise.
I already use RTI. Will I automatically get the Employment Allowance?
No, you need to tell HMRC that you qualify and intend to claim the Employment Allowance in your RTI submissions. In FreeAgent, you will be able to opt-in to the Employment Allowance. After that, FreeAgent will do all the calculations and submissions for you!
How much Employment Allowance can I claim?
You can claim up to £3,000 per year. This is not a per-employee amount, the £3,000 is the total amount any business can claim in any tax year. The amount that you can claim will depend on the amount of employer’s National Insurance that you pay in any given year. If your Employer’s NI payments total less than £3,000 for a tax year, you may be able to reduce your PAYE due- speak to your accountant for more guidance.
How much will I receive in any given month?
The amount of Employment Allowance that you can claim will depend on the total amount of employer’s National Insurance you pay. If you pay less than £3,000 of Employer’s NI per month, you can reduce your Employer’s NI payment to zero until your allowance is used. If your monthly Employer’s NI bill is over £3,000, you can reduce that amount by £3,000 for one month.
For example, if a company employs two staff members at £20,000 each per annum, here is what they would have normally paid in Employer’s NI, and their new adjusted payments after claiming the Employment Allowance.
|Month||Employer’s NI contribution payable if no Employment Allowance claimed||Adjusted Employer’s NI contribution payable with Employment Allowance claimed|
|1 - April||£273.42||£0|
|2 - May||£273.42||£0|
|3 - June||£273.42||£0|
|4 - July||£273.42||£0|
|5 - August||£273.42||£0|
|6 - September||£273.42||£0|
|7 - October||£273.42||£0|
|8 - November||£273.42||£0|
|9 - December||£273.42||£0|
|10 - January||£273.42||£0|
|11 - February||£273.42||£7.62|
|12 - March||£273.42||£273.42|
Remember, there's still tax to pay
Employment Allowance only applies to your employer’s National Insurance contribution. You will still need to pay Employee’s National Insurance and any other tax to HMRC each month!
Can I only claim at the beginning of a tax year?
You can claim the Employment Allowance at any point during the tax year. If you don’t use your full Employment Allowance in the months after you start your claim, HMRC will set the unused allowance against your PAYE liabilities.
- Make sure that you qualify for the Employment Allowance and are likely to continue to qualify for the entire tax year. (Remember - if you no longer qualify later in the year, you will have to pay the money back!)
- Make sure your payroll software or provider supports RTI and the Employment Allowance - FreeAgent does!
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