As an employer, you may have heard something about the Employment Allowance, but what’s it for and how do you get it?
First, a bit of background. The PAYE you must pay to HMRC has three components: (1) the income tax and (2) the National Insurance Contribution (NIC) that you deduct from each employee’s gross pay, plus (3) a NIC that comes from the employer.
The Employment Allowance was introduced to help toward the latter – the green piece of pie.
It effectively allows you to underpay the employer’s NIC by up to £5000 in a tax year.
Many small businesses no longer pay any National Insurance at all. Yay!
A couple of examples:
Medium Size Co Ltd pays employer NICs of £2000 each month.
In April the Employment Allowance will knock £2000 off their PAYE bill.
In May they’ll save another £2000.
In June they’ll save £1000.
That’s the whole £5000 Allowance used up, so from July they’ll pay the full £2000 again.
On the other hand, Teeny Co Ltd’s employer NICs are only £60 per month so their total claim for the year will be just £720.
- Director-only companies don’t qualify.
- You won’t qualify if most of your work fulfils public sector functions – e.g. rubbish collection, NHS services.
- You won’t qualify if you employ someone for personal or household work – e.g. gardener, nanny – unless they’re a care or support worker.
How to Claim
If you use a payroll agent they should take care of this. Otherwise you’ll need to use your own payroll software or HMRC’s Basic PAYE Tools to file an Employer Payment Summary (EPS) every tax year, telling HMRC you are using the Allowance to cut your payments.
Things to watch out for
- If your company belongs to a group of companies, only one can claim the allowance.
- If a company has control of another company, or both companies are under the control of the same person or persons, these companies are connected. Only one of the connected companies can claim the allowance.
- You can only claim the Employment Allowance against one PAYE scheme – even if your business runs multiple schemes.