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The Employment Allowance allows eligible employers to reduce their National Insurance liability. The allowance increased to £4,000 (was £3,000) from 6 April 2020.
This represented a tax boost for almost 500,000 small businesses who can now claim an increased reduction on their National Insurance Contribution (NIC) liabilities or even reduce their bills to zero.
An employer can claim less than the maximum if this will cover their total Class 1 NIC bill. You can claim the Employment Allowance if you are a business or charity (including community amateur sports clubs).
The allowance is only available to employers that have employer NIC liabilities of under £100,000 in the previous tax year. Connected employers or those with multiple PAYE schemes will have their contributions aggregated to assess eligibility for the allowance.
The Employment Allowance can be used against employer Class 1 NICs liability. It cannot be used against Class 1A or Class 1B NICs liabilities. The allowance can only be claimed once across all employer’s PAYE schemes or connected companies. Therefore, employers need to decide which PAYE scheme to set the claim against.
Since April 2020, Employment Allowance claims will also need to be submitted each tax year. This means that the relief will not automatically reduce your paye bill as was formerly the case.
The Employment Allowance will be operated as de minimis State aid. This means that you must have space to accommodate the full Employment Allowance within your relevant de minimis limit, currently €200,000 over three years.
There are currently a number of excluded categories where an employer cannot claim the employment allowance. This includes:
- Limited companies with a single director and no other employees;
- Persons employed for personal, household or domestic work, such as a nanny or au pair (unless they are a care or support worker);
- If you are a public body or business doing more than half your work in the public sector;
- If you are a service company working under 'IR35 rules' and your only income is the earnings of the intermediary.
The eligibility to claim the employment allowance was removed for limited companies with a single director and no other employees in April 2016. As the employment allowance was introduced as an incentive to take on staff it was felt unfair that companies with a single director and no employees should benefit from the allowance.
Making a claim
You can claim at any time in the tax year, as long as your business or charity has employer Class 1 NICs liabilities and is eligible to claim the Employment Allowance. Of course, the earlier you claim the sooner you will get the allowance. You can claim using your own payroll software or using HMRC’s Basic PAYE tools.
Backdating a claim
You can make a claim for the Employment Allowance up to 4 years after the end of the tax year in which the allowance applies. For example, if you want to make a claim for the allowance for the tax year 2016-17, you must make your claim by no later than the 5 April 2021.
To claim for past years, it does not matter how much your employers’ Class 1 NICs liability was or how much de minimis state aid you received. Note that the employment allowance was £3,000 each year between April 2016 and April 2020.