If you are an employer (and that includes employing yourself as a director), you could be eligible to claim ‘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 £4000 a year.
How does it work?
When you pay your employees more than around £737 a month in the 21/22 tax year, 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 . You literally deduct the amount you would be paying from the £4000 limit, until you’ve used it all up. You just hand over the money owed to HM Revenue & Customs that month, less the amount of allowance used.
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 £737 (21/22 tax year).
- 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.
How do I claim?
You usually claim your EA inside of 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, you need to
- Tick a box marked ‘Yes’ next to the ‘Employment Allowance
- Submit a ‘EPS – Employment Payment Summary’ to HM Revenue & Customs through the software.
TRAP: You need to do this each tax year, it won’t automatically roll over.
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.
What if I’ve missed out on this already?
You can actually use your software to claim backwards for the previous 4 tax years, and request a refund from HM Revenue & Customs. Ask your accountant for details on how to do this if you are unsure.
And finally… Director tax planning
Without getting too technical in this blog, the Employment Allowance can also be useful for small limited companies with two directors to save some tax, by paying themselves up to the personal allowance (£12,570 in 21/22). There are various reasons for this, so if this is you, it’s worth speaking to an accountant about whether in your circumstances this will save tax.
I’d like some help on claiming EA
You can ask your accountant for help. Or, if you prefer, you can book a consultation with us. We offer a paid 1-hour, 1-2-1 consultation so you can ask simple questions of an accountant. You don’t have to sign up with us or anything, so it’s a convenient way for you to get the help you need, when you need it.