If you have employees, your business may be eligible to reclaim up to £4,000 of employers’ National Insurance Contributions from HMRC each year, thanks to the Employment Allowance.
What is the Employment Allowance?
The Government set up the EA scheme in April 2014, to encourage businesses to take on more employees.
Under the scheme, eligible businesses are able to reduce their annual Class 1 employers’ NIC bill by up to £4,000.
The original limit was £2,000 before it was increased to £3,000 in April 2016, before rising to its current level during the 2020/21 tax year.
Is your small business eligible?
Most businesses can claim the EA – sole traders, partnerships, and limited companies that have employees. However, there are some notable exclusions (such as limited companies with a sole director/employee).
- Your business can claim if its total employers’ NIC bill was £100,000 or less during the previous tax year. This is also the total limit for a group of companies, or if you have more than one payroll.
- If you are the director of your own limited company and are the sole employee earning about the Class 1 National Insurance secondary threshold (£8,840 in 2021/22), you are ineligible to claim.
- You cannot claim the allowance on any contract income your business makes which falls under the IR35 / Off-Payroll rules.
- Significantly, the EA only applies to Class 1 NICs, so the ‘self-employed’ (sole traders and partnerships) can only benefit if they have employees, and incur a Class 1 employers’ NIC liability during any given tax year.
- You can’t claim if 50% or more of your business is carried out in the public sector, or if you’re a public sector body. This exclusion won’t apply if you provide security or cleaning / janitorial services for a public building or provide computer/IT services for a public sector body.
Read the fine details about eligibility here.
How does the EA work in practice?
In practice, your business won’t physically re-claim the EA. Instead, each time you run the payroll, the allowance will be factored into your year-to-date employers’ NIC bill, until the entire £4,000 limit has been reached, or until the end of the current tax year.
For example, if you run a business with two employees, both earning £25,000 during the 2021/22 tax year, your company will be liable for £2,230.08 in Class 1 employers’ NIC per employee – giving a total of £4,460.16.
Thanks to the EA, the first £4,000 are offset, and the total employers’ NIC bill for the year will be £460.16 – a significant saving.
The whole process of claiming the EA is an automatic one – either via your accountancy software provider (RTI) or by using HMRC’s Basic PAYE Tools software. Make sure your software provider – such as FreeAgent – supports RTI (RealTime Information) and the Employment Allowance.
You must actively opt in to claim the EA, even if your business already submits payroll information to HMRC via RTI. You should talk to your accountant if you believe your business is eligible, and you have yet to opt in.
Further things to bear in mind
- The £4,000 limit applies to each business, not to each employee!
- The EA only applies to Employers’ NICs, not Employees’ NICs (which are collected by employers on behalf of their employees).
- Your business can claim the Allowance at any time during the tax year.
- During any given tax year, if your business no longer meets the eligibility criteria, you must inform HMRC, and return any overclaimed EA funds.
- There’s a good summary article, with example calculations here.
Last updated - 4th March, 2021