In the UK, certain businesses are eligible to claim an Employment Allowance. This allowance permits businesses to reduce their annual employer’s National Insurance Contributions by up to £3,000.
However, from 6 April 2020, the government is changing the criteria, meaning not all businesses who currently benefit will be able to claim the allowance in the 2020/21 tax year.
Pre April 2020
Up until 5 April 2020, most businesses can claim a reduction for Class 1 National Insurance Contributions (NICs) they pay.
However, freelancers and contractors who work on a self employed basis and therefore pay Class 2 and Class 4 NICs cannot use the allowance, as it is only businesses with employees and that operate a PAYE scheme and pay Class 1 NIC that are eligible.
In addition to this, you cannot claim the allowance if you personally hire someone for domestic work (e.g. nanny or gardener) or you carry out more than 50% of your work in or for the public sector.
Some exceptions apply to public sector workers, for example, those who supply IT, cleaning or security services for a government or local council buildings such as offices.
Further guidance on eligibility for employment allowance is available on the
gov.uk website.
What are the rules?
The employment allowance is not just a one-time exemption; it is an allowance, which is renewed every tax year.
As an example, a company with one full-time employee with a salary of £22,000 per year will incur employer NIC’s of £156.12 per month, or £1,873.49 per year.
As the employer’s NICs is falls within the £3,000 allowance, there will be no employer NIC to pay.
However, if a company has an employee with a salary of £35,000 per year, it will be subject to employer NICs of £3,667.44 per year.
As this falls outside of the £3,000 allowance, the employer will be subject to a NIC bill of £667.44 for the year.
N.B. The employment allowance is per company and not per employee.
The remaining balance o £667.44 will only be paid once the Employment Allowance has been exhausted; therefore, the business would pay:
• Months 1 – 9: £0
• Month 10: £56.20
• Month 11: £305.62
• Month 12: £305.62
What changes will be made?
After the 6th April 2020, only small businesses (with a NIC bill of £100,000 or less) will be eligible to claim the employment Allowance.
Originally introduced in 2014, the allowance was intended to entice and support employers to grow their teams and hire new staff.
However, as the allowance is a flat rate of £3,000, it does not act as major contributing factor for large businesses to grow and hire more personnel.
This is one of the reasons why the government has decided to scrap the scheme for these larger businesses.
How can I claim the Allowance?
For businesses that are eligible, the employment allowance is automatically subtracted from their Employer NIC liability by their payroll software provided it has been set up correctly to do this.