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What Is The Employment Allowance and How Do I Get It?

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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.

PAYE pie chart

To encourage job creation, 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. From 6 April 2025 the EA covers up to £10,500 in a tax year.

Many small businesses no longer pay any National Insurance at all. Yay!

A couple of examples:

Each month, Medium Size Co Ltd pays employer NICs of £2000.

  • In April the Employment Allowance will knock £2000 off their PAYE bill.
  • In May, June, July and August, they’ll also save £2000 a month.
  • In September, they’ll save £500.

That’s the whole £10,500 Allowance used up, so from October, they’ll pay the full £2000 again.

On the other hand, Teeny Tiny Co Ltd only pays employer NICs of £40 per month.

So their total claim for the year is £480.

Eligibility

  • A limited company where the director is the only employee paid above the NI Secondary Threshold (£5000 pa) doesn’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.

Further information

Gov.uk overview and detailed guidance – the rules and regs

Key facts about National Minimum Wage

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Who gets it – and who doesn’t?

  • It’s a criminal offence to not pay someone the National Minimum Wage
  • It applies to most workers over school leaving age including casuals, part-timers and agency workers
  • All businesses must comply – regardless of size
  • It doesn’t apply to self-employed people or company directors

Why NMW matters to employers

If your company has underpaid its workers, the consequences could be severe:

Arrears

You must pay arrears to the worker immediately and you may end up paying more than you would have if you had paid the correct amount to start with. In one instance, a national retailer was forced to make back payments of £193,000 for almost 3,500 workers after it required them to be at work before and after opening hours without pay.

Naming and shaming

HMRC will now publicly name any employer, big or small, who breaks minimum wage law.

Penalties and prosecution

On top of the arrears, employers risk financial penalties of up to £20,000.

Criminal prosecution is rare but the most serious cases can be heard in a Crown Court, meaning that there’s a potential for an unlimited fine.

How is NMW enforced?

HMRC have the power to check your wages at any time – it’s your responsibility as an employer to keep records proving compliance with NMW and you have to keep these for 3 years.  You could be randomly targeted or a worker’s complaint could trigger an investigation.

Out of the blue, our biggest client received a random minimum wage inspection. The HMRC inspectors spent a full day digging into the payroll and payment records.

 

We handled the entire assessment on behalf of our client and were happy to host the compliance team at our premises. They delved into the current year’s files as well as the previous three years’ files, picking staff at random and tracing their wages from timesheet to bank account.

 

We spent the day making them tea and being quizzed in depth, using paper and electronic records to prove compliance. With a good understanding of the business, we could answer HMRC’s questions with confidence.

 

The client passed the inspection with flying colours.

 

microscope
Would your business stand up to scrutiny?

Where can I get more help?

The rates change in April each year. Rates for previous years can be found at gov.uk.

A good payroll provider will watch out for NMW compliance issues as part of the service.

  • ACAS 0300 123 1100 (Mon to Fri 8am-8pm, Sat 9am-1pm)

ACAS gives free impartial advice to employers and workers.

Follow this link to report NMW breaches.

This article updated Oct 2024.

Image credit: University of Liverpool Faculty of Health (CC BY 2.0)