Employment allowance can be claimed by a business which has a payroll with at least one employee or two directors earning over the secondary threshold. The £4,000 allowance increases to £5,000 from April 2022.
It is set against your Class 1 National Insurance contributions due for the month thereby reducing the total amount of tax and PAYE to be paid to HMRC. With businesses having to pay an additional 1.25% in national insurance contributions from April 2022 businesses with only one or two full- time or several part-time employees may find that the employment allowance will cover this additional cost.
The allowance cannot be used to reduce employee contributions or tax deductions. Unused Employment Allowance cannot be carried forward into a new tax year.
There are rules around whether a business is eligible to claim employment allowance:
- Employment allowance is only available to employers who pay less than £100,00 per annum in Class 1 National Insurance contributions. The prior tax year is used to assess eligibility for the current year claim.
- Businesses with more than one payroll will need to add together the Class 1 NICs for the previous year for each PAYE scheme and if they total more than £100,000 no Employment Allowance can be claimed. If they total less than £100,000 the Employment Allowance can be claimed on one of the PAYE schemes. If the full amount cannot be claimed by one payroll during the year you can apply to HMRC to have the balance set against another PAYE scheme within the same business.
- Businesses or charities that are connected (are under control of the same person or persons) cannot claim the Employment Allowance if the total Class 1 NICs across all companies total more than £100,000. However if the total is less than £100,000 they can claim on one company or charity. Any unused allowance cannot be transferred to another company.
- Employers cannot claim the Employment Allowance if their payroll is for personal domestic staff employed for the running of a household.
- Owners of a franchise can claim the Employment Allowance but if they own two or more franchises they can only claim on one of them.
- Sole traders and partnerships can claim the Employment Allowance if they have a payroll and employ staff.
- If a business takes over another business they cannot use the remaining Employment Allowance but can continue to claim the Employment Allowance for their current business. In this instance the Employment Allowance already claimed by the business which has been taken over does not need to be repaid.
- If a director is the only employee of a company the Employment Allowance cannot be claimed. If there are two directors on the payroll and they are both earning above the secondary threshold they can claim the Employment Allowance. If there is one director plus employees earning over the secondary threshold then the Employment Allowance can be claimed. If one or more employees do not earn above the secondary threshold the Employment Allowance cannot be claimed. If circumstances change during the tax year which make the company eligible to claim the Employment Allowance you can claim the full £4,000.
- If you stop being eligible to claim during the tax year you must advise HMRC through your payroll submission and pay any NIC due.
If you have a payroll ensure you have claimed this Employment Allowance. If you haven't you can make a request to claim it going back 4 years.