The HMRC employment allowance is a great example of a relatively small but very helpful government scheme that many businesses have never heard of. It gives small businesses immediate relief from their National Insurance contributions, freeing up a little extra cash.
As with all things HMRC, it can seem complex at first. But it's designed to be automated as part of your regular payroll. So once you're set up, you don't have to do anything else.
This article explains what the employment allowance is and how it works, which companies are eligible, and how to make sure you receive it.
Keep on reading.
|Note: This article is an introduction and guide, and should not be read as legal or financial advice of any kind.
If you need help with corporate tax and National Insurance, seek professional advice or speak to HMRC directly.
What is the HMRC employment allowance?
HMRC’s employment allowance lets certain companies reduce their yearly national insurance liability by up to £4,000. For smaller businesses with eligible employees, this allowance effectively eliminates the first £4,000 of Class 1 National Insurance Contributions (NICs).
The allowance applies per business - not per employee. So whether you have one employee generating £4,000+ in NICs per tax year, or 10 employees generating the same, you can only claim up to £4,000.
How the employment allowance works
New rules in April 2020 changed the scheme somewhat. A few specific extensions were made, and the amount to be claimed has increased. Which is important to note, because you can claim up to four years after the end of a particular tax year.
If your business is eligible and you want to claim the allowance for past years, the amounts you can claim look like this:
- 2015-16: Up to £2,000
- 2016-20: Up to £3,000
- April 2020 onwards: Up to £4,000
While these amounts apply to the tax year, they’re taken on a payroll-by-payroll basis. So you don’t wait until the end of the year to claim relief - instead, proportionate amounts are applied each time you process payroll with HMRC.
So assuming you make Real Time Information (RTI) submissions to the tax office, you’ll have lower NICs throughout the year. In other words, the sooner you claim, the earlier you’ll receive the allowance.
This continues until you hit either the threshold or the end of the tax year - whichever comes first.
How to file claims
Because NI deductions are made on an ongoing basis, how you claim depends slightly on how you run your payroll.
Using HMRC’s PAYE tools
The tax office has built the employment allowance into its tools, so the process should be relatively straightforward. Here are the steps according to HMRC’s own guide:
- Select the correct name in the ‘Employer’ menu on the home page.
- Select ‘Change employer details’.
- Select ‘Yes’ in the ‘Employment Allowance indicator’ field.
- Answer ‘Yes’ to the ‘Do state aid rules apply?’ question if you sell goods or services. Select the business sectors that apply to you. Otherwise, answer ‘No’ and select ‘State aid rules do not apply’.
- Send your Employer Payment Summary (EPS) as normal.
If you don’t use HMRC’s PAYE tool, you’ll need to ensure that your next EPS includes an “Employment Allowance indicator” field. And this field should be set to “Yes.”
What if you haven’t claimed?
If at the end of the tax year you have unused employment allowance remaining on your balance, you have a few options. In either case, you’ll have to talk to HMRC directly.
First, you can put any unclaimed employment allowance towards tax owing. This includes VAT and Corporation Tax.
Second, if you don’t have any tax owing, you can request a refund.
Which companies are eligible for the allowance?
Your company may be eligible for the allowance if:
- You run a business or charity; and
- Your Class 1 National Insurance liabilities were under £100,000 in the last tax year.
If you’re part of a group of companies or charities, the total Insurance liabilities for the group must be under £100,000. If you have more than one payroll, the total of the combined payrolls must also be under £100,000.
Unlike general domestic and household workers (who we’ll see next), care and support workers are explicitly covered under the scheme.
Which companies are not eligible?
There are a few circumstances in which companies cannot claim the employment allowance:
- If the majority (more than half) of your work is in the public sector. Notable examples are council bodies and the NHS;
- If your company only has one employee earning over the Class 1 National Insurance threshold, and that person is also a director.
- If your employees don’t pay Class 1 National Insurance Contributions (NICs). This is usually the case for freelancers and contractors, for example.
Employees who perform personal, household, or domestic work also cannot be included in your claim, unless they’re a care or support worker.
Calculate your potential employment allowance amounts
As explained above, if eligible, you can claim up to £4,000 from April onwards. Of course, you’re not automatically entitled to the full amount - your claim depends on the amount of NICs generated by each employee.
So to calculate your overall claim can be somewhat tricky. You need to know the NICs generated by each employee during the tax year. (This is why it’s easiest to let HMRC make the calculations.)
The actual employer contributions change based on the employee’s “National Insurance category letter” - essentially the type of job they have. But for most, the rate is 13.8% on earnings above a certain threshold.
For example, a full-time employee making £24,000 per year (£2,000 per month) would generate an employer contribution of £174.98 per month. This amounts to £2099.76 per year - slightly over half the company’s allowance.
So two employees earning that amount would represent the full employment allowance for the tax year.
HMRC has an NIC calculator to do these assessments on a per-employee basis. Be sure to check the employee’s category letter; in most cases for full-time workers the letter is “A.”
Take advantage of the government’s allowances
Here is another example of potential tax and National Insurance relief for companies, as provided for by HMRC. It’s vital that businesses understand their rights and responsibilities, and make the most of these opportunities.
Other examples of HMRC allowances and relief include:
- Mileage allowance
- Meal allowance for traveling employees
- HMRC’s 24-month rule
- Advisory fuel rates
- R&D tax credits
The goal is to use these advantages and benefits without micromanaging your own company tax situation. Accounting automation is a good start - this will do the calculations and file claims without much effort on your part.
And this goes hand-in-hand with an overall attention to company cash. The more you can track, evaluate, and make real time decisions about spending, the more profitable and sustainable you’ll be.
In short, smart spend management helps companies grow.