As every business owner knows, managing a payroll and making National Insurance deductions are important considerations if you employ staff. But did you know that you might be able to reduce your National Insurance payments by claiming Employment Allowance? Here’s our summary of how the Employment Allowance works.
What is the Employment Allowance?
The Employment Allowance enables eligible businesses to reduce their National Insurance liability by to up £4,000 (2021/22) a year. The tax relief scheme was first introduced in 2014 and is designed to help small businesses with their employers’ Class 1 National Insurance bills.
How does the Employment Allowance work?
The Employment Allowance is an annual entitlement available to eligible small businesses in each tax year. If your business is entitled to Employment Allowance, you can claim a reduction of up to £4,000 (or any amount below this limit) against your Class 1 National Insurance liability.
The reduction is applied each time you run your payroll until the £4,000 entitlement has been used, or when the tax year ends (whichever comes first).
Who is eligible for Employment Allowance?
Employment Allowance eligibility isn’t universal. It is available to businesses (or charities) whose employers’ Class 1 National Insurance liabilities were under £100,000 in the previous tax year. The rules around who could claim Employment Allowance were changed in April 2020; since this date, the allowance has been targeted principally at small businesses. In fact, the government estimates that 99% of micro-businesses and 93% of small businesses are still eligible to claim Employment Allowance.
Who can’t claim Employment Allowance?
Since the 2020 change in Employment Allowance rules, there are various situations in which a business or individual can’t claim Employment Allowance. The following are ineligible for Employment Allowance:
- Self-employed sole traders, as they pay Class 2 and Class 4 National Insurance contributions.
- Larger companies (those whose Class 1 National Insurance liabilities exceeded £100,000 in the previous tax year).
- Companies with only one employee paid above the Class 1 National Insurance secondary threshold, and that employee is a director of the company.
Additionally, you can’t claim Employment Allowance for off-payroll workers who are ‘within IR35’, or for employees who are delivering personal or domestic work, such as cleaners or gardeners, unless they are a care or support worker.
Additional Employment Allowance rules
While we’ve covered the basics, it may be worth looking into the small print of how Employment Allowance works. For example, your Employment Allowance counts towards your ‘de minimis state aid’, and you should make sure that the total amount of de minimis state aid you receive is below your sector’s threshold in a three-year period. For more information on what this means in practice, visit GOV.UK.
In addition, ‘deemed payments’ to off-payroll workers are not included as part your £100,000 Employment Allowance limit, so you should not deduct National Insurance from these workers or include it in your calculations.
How do you claim Employment Allowance?
You can make an Employment Allowance claim at a time of your choosing during the tax year. The claim can be backdated by up to four years if you have sufficient information to support your claim.
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Tyl Talks is our content hub with small business articles and guides galore. For more number-crunching insights on how to manage your business tax responsibilities, check out some of our latest guides below:
This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.
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