Employment Allowance explained – don’t miss out on £5000 for your business

Kirsty Young Business Tips, Limited Company

If you are an employer (and that includes employing yourself as a director), you could be eligible to claim the ‘Employment Allowance’ (EA).

By making the most of your Employment Allowance, you can reduce the amount of National Insurance you need to pay to HM Revenue & Customs on behalf of your employees by up to £5000 a year.

 

How does it work?

In the 24/25 tax year, when you pay your employees more than around £758 a month, you will have to pay National Insurance (NI) contributions known as ‘Class 1’. Class I NI contributions currently run at 13.8% on those earnings.

That is one hefty bill. The EA can reduce that amount considerably. Here’s how it works:

  • You (usually) have an allowance of £5000 a year.
  • You deduct the amount of Employer’s National Insurance covered by the allowance from your monthly payment to HMRC.
  • You just hand over the money owed to HM Revenue & Customs that month, less the amount of allowance used.
  • Each time you do this, you deduct the amount of allowance used from the £5000 annual limit, until you’ve used it all up.

What’s more, you don’t have to use it all every month. It is possible to use it over the course of the tax year, as and when you are due to pay these National Insurance contributions.

 

Am I eligible to claim?

You can claim EA if you are a business or charity whose National Insurance Class 1 bill was less than £100,000 in the previous tax year – so that’s most small businesses!

However, you can’t claim if:

  • Your company only has one employee paid more than £758 (24/25 tax year).

AND

  • That employee is a director.

There are some other specifics but in the main, these are the two that most small businesses need to consider. If you own multiple businesses, you will definitely want to check the additional specifics, as in some circumstances only one of your payroll schemes can claim this allowance.

 

How do I claim?

You usually claim your EA from within your payroll software. You can also do this using HM Revenue & Customs free ‘Basic Tools’.

In order to run a payroll / ‘PAYE’ scheme, you will be submitting regular ‘Real Time Information’ returns. Claiming your EA is done using one of these.

To claim your Employment Allowance, you need to:

  • Tick the box marked ‘Yes’ next to the ‘Employment Allowance

AND

You only need to do this once per tax year, and you can do it at any time during the year. We’d advise doing this as early as you need it.

In theory, once you’ve sent your claim in for the first time, it should continue until you send another Employment Payment Summary telling HMRC you are no longer eligible. However, we’ would recommend keeping an eye on your EA status each tax year to make sure the system is working as intended (HMRC systems are far from perfect!).

To check, you can log into your HMRC business tax account and look at your PAYE section. Comparing what you see with your own payroll reports should tell you whether it is all working .

If you need to stop claiming and are completing payroll yourself, you should have a detailed read of the additional HMRC guidance about when and how to report this. Not exciting but necessary!

 

What if I’ve missed out on this already?

Good news! You can use your software to claim backwards for the previous 4 tax years and request a refund from HM Revenue & Customs. Ask your accountant or payroll provider for details on how to do this if you are unsure.

 

And finally… Director tax planning

The Employment Allowance can also be useful for small, limited companies with two directors. They can potentially save some tax by paying themselves up to the personal allowance (£12,570 in 24/25). If this applies to you, it’s worth speaking to your accountant about whether this will save tax in your particular circumstances.

 

Help is at hand

If you need help with payroll services and workplace pensions, just get in touch with the team to talk through your requirements.