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 (HMRC) on behalf of your employees. You could save up to £10,500 a year.
How does it work?
In the 25/26 tax year, when you pay your employees or yourself (!) more than around £417 a month, you will have to pay National Insurance (NI) contributions.
Known as ‘Class 1’ NI contributions, these currently run at 15% on earnings above the Secondary Earnings threshold, up from 13.8%.
Previously you could earn around £758 per month before NI kicked in. So you will be paying a lot more NI than you were last year.
Use EA to shrink your NI bill
The good news is that by using the EA, you can reduce that amount considerably. Here’s how it works:
- If you qualify, you have an allowance of £10,500 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 HMRC that month, less the amount of allowance used.
- Each time you do this, you deduct the amount of allowance used from the £10,500 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 NI contributions.
With this in mind it’s likely if you are a very small employer than you will not have to pay any Employers National Insurance as your allowance might cover all of it!
Am I eligible to claim?
You can claim EA if:
- You are a business
AND
- You do less than 50% of your work in the public sector (such as for local councils and NHS services)
However, you can’t claim if:
- Your company only has one employee paid more than £417 per month in the 25/26 tax year.
AND
- That employee is a director.
The combination of these rules means then that solo director companies cannot claim EA.
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 the HM Revenue & Customs free ‘Basic Tools’.
In order to run a payroll / Pay As You Earn (PAYE) scheme, you will be submitting regular ‘Real Time Information’ returns. Claiming your EA is done using one of these.
To claim your EA, you need to:
- Tick the box marked ‘Yes’ next to ‘Employment Allowance’
AND
- Submit a ‘EPS – Employment Payment Summary’ – to HMRC through the software.
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.
Do I need to claim every time?
In theory, once you’ve sent your claim in for the first time, it should continue until you send another Employment Payment Summary specifically 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! You can also call us for advice by using our one-to-one consultations – call us for details.
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 HMRC. Ask your accountant or payroll provider for details on how to do this if you are unsure.
And finally… Director tax planning
Whilst the Employment Allowance is most commonly used by a limited company to help tax reduce the employment cost of their teams, in micro teams it can help efficiently pay directors.
For example, two directors could potentially save some tax and National Insurance by paying themselves up to the personal allowance (£12,570 in 25/26). If this applies to you, it’s worth speaking to your accountant about whether this will save tax in your particular circumstances.
We cover more on this topic in our Director’s Pay blog.
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.