What is the Employment Allowance and am I eligible?

Blogs 16 Oct 2020

A guide to the £4,000 Employment Allowance for small business owners, including who is eligible, what it involves and how you can claim it.


What is the Employment Allowance?

The Employment Allowance lets eligible employers reduce their National Insurance liability by up to £4,000 for the 2020/21 tax year. It’s designed to support smaller employers with their employment costs. It increased from £3,000 to £4,000 after successful lobbying by FSB.

This means that you’ll pay less employers’ Class 1 National Insurance each time you run your payroll until the £4,000 has gone, or the tax year ends, whichever is first. You can still claim the allowance if your liability was less than £4,000 a year.

Employers’ Class 1 National Insurance contributions are 13.8 per cent on all earnings above the secondary threshold, which is currently £169 per week, £732 per month or £8,722 per year.

Am I eligibe to claim?

✔️ You are registered as an employer.

✔️ Sole trader, limited company or partnership that has employees.

✔️ Limited company that employs only directors, where two or more directors earn more than the secondary threshold for Class 1 National Insurance contributions. There is additional guidance from HMRC for single-director companies.

✔️ Employers’ Class 1 National Insurance liabilities were less than £100,000 in the previous tax year.

However, it doesn’t apply to contributions made where IR35 applies, so don’t include off-payroll workers in your calculations, as they don’t count towards the £100,000 threshold.

You can find more information about eligibility criteria on the government website.

How does it work?

The £4,000 allowance applies to your business, not to individual employees. So, for example, if your NI bill is £4,500 in total for the tax year, you’ll only need to pay the £500 excess.

If you have more than one payroll, you can only claim against one of the payrolls.

The allowance is classed as de minimis state aid if you make or sell goods and services. There’s a limit to how much of this you can get. Check the government website for more information.

How do I claim?

The government has detailed guidance on how and when to make your claim. You can claim at any point during the tax year as part of your Real Time Information (RTI) submission to HMRC. You’ll then pay less employer NICs each month until the £4,000 total has been reached.

What is an employment payment summary?

Claiming Employment Allowance isn’t an automatic process, so you’ll need to tell HMRC that you qualify and want to claim. An employment payment summary (EPS) is sent to HMRC to apply any reductions on what you’ll owe from your Full Payment Submission, including the Employment Allowance.

Do I only need to tell HMRC once?

You need to claim Employment Allowance every tax year to ensure you’re still eligible. Relief can’t be carried over between tax years.

If your situation changes and you’re no longer eligible for the allowance, you’ll be required to make repayments.

More questions?

You can find further guidance on the government website. FSB members can get in touch with our payroll experts from FSB Workplace Pensions for advice and guidance.

How can FSB help?

Spend less time on admin and more time running your business with FSB Workplace Pensions’ fully supported payroll service. From data collection to distribution of payslips, we’re here to help your business run smoothly.


 

FSB Workplace Pensions

FSB Workplace Pensions service provides independent financial advice to FSB members, helping thousands of businesses to set up their schemes and comply with legislation. It also offers a bespoke and fully supported payroll service.

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