The Employment Allowance: what you need to know

Employers’ National Insurance is a levy that employers in the UK pay on top of the wages they pay their employees. It helps to fund important public services like the NHS.

The Employment Allowance allows business owners who employ staff to reduce their employer’s National Insurance (NI) bill by up to £5,000 per year. The Employment Allowance does not apply to employees’ National Insurance.

Does my business qualify for the Employment Allowance?

To qualify for the Employment Allowance, your business must employ staff and pay wages. Your business will not be eligible if it is a limited company with only one director and that director is the company’s only employee, earning above the threshold for employers’ NI (this is a change to the rules that was brought into effect on 6th April 2016).

If you’re a sole trader or in partnership and don’t employ any staff, your business doesn’t qualify because you and/or your partners aren’t employees, and any money you take out of the business isn’t subject to employers’ NI.

On 6th April 2020, new rules came in meaning you won’t qualify for Employment Allowance if your employer’s NI bill is over £100,000 a year. This threshold will be removed in April 2025, removing the effective disqualification for larger businesses. You won’t be able to claim the Employment Allowance between April 2020 and April 2025 if your employer’s NI bill was above £100,000 for the tax years in question.

For some Northern Irish businesses, Employment Allowance counts as ‘de minimis state aid’ (financial support from the government allowed under EU rules). You can find out if this affects you here.

Some types of business don’t qualify for the Employment Allowance, even if they employ and pay staff. These are businesses that:

• are limited companies with only one director (who is also the sole employee earning above the employers’ NI threshold)
• employ domestic workers
• work more than 50% in the public sector

However, security guards and cleaners working in government buildings as well as businesses working on IT contracts for governments are likely to qualify for the Employment 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.

If you haven’t claimed previously but have been paying employers’ National Insurance, you may be able to claim the Employment Allowance for the previous four tax years. You can find out more about claiming for previous tax years on the gov.uk website.

How to claim the Employment Allowance

How you claim the Employment Allowance will depend on how you run payroll for your business.

If you use payroll software, you may be able to claim the Employment Allowance from within the software, when you run payroll. For example, if you use FreeAgent and are eligible to claim the allowance, you just need to check a couple of boxes. FreeAgent will then inform HMRC that you are eligible for the Employment Allowance when you file your next payroll, and will automatically apply the reduction to your employer’s NI contributions.

If you’re not using payroll software, you may be able to use HMRC’s Basic PAYE Tools to claim the allowance.

How much Employment Allowance can I claim?

You can claim up to £5,000 per year. This is not a per-employee amount, the £5,000 is the total amount any business can claim in any tax year.

The amount you can claim will depend on the amount of employers’ National Insurance that you pay in any given year. If your employer’s NI payments total less than £5,000 for a tax year, you may be able to reduce your PAYE due - speak to your accountant for more guidance.

Remember, there's still tax to pay

Employment Allowance only applies to your employer’s National Insurance contribution. You will still need to pay National Insurance on behalf of your employees (which is deducted from their pay) 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.