Updated on: Oct 3, 2023
As the year 2023 rolls on with businesses incurring higher costs, it is more important than ever to stay well-informed about the latest changes and updates regarding tax reliefs and cost saving ideas. The Employment Allowance is one area where businesses can save money. Understanding the eligibility criteria, claiming process, record-keeping requirements, and potential benefits can help small businesses thrive in today’s competitive market. In this comprehensive guide, we dive deep into the world of Employment Allowance, equipping you with the knowledge to make well-informed decisions for your business’s financial success.
Want to watch our YouTube video instead? It summarises the main points but refer back to this article for more in-depth information.
- Eligibility for Employment Allowance in 2023 requires employers to be registered with HMRC, have employees earning above the NI threshold and possess Class 1 National Insurance liabilities under £100,000.
- Businesses must use compliant payroll software and submit EPS to HMRC when claiming the allowance.
- Claiming Employment Allowance can reduce employment costs, improve competitiveness and provide financial relief enabling businesses to better manage resources.
Eligibility Criteria for Employment Allowance
Certain eligibility criteria must be met by eligible employers planning to claim Employment Allowance in 2023. These criteria encompass:
- Being a registered employer with HM Revenue and Customs (HMRC)
- Having employees earning above the National Insurance (NI) secondary threshold
- Possessing Class 1 National Insurance liabilities under £100,000
Remember, a limited company can only claim Employment Allowance against one payroll, even if it operates more than one payroll.
However, not all business types qualify for Employment Allowance. The details of registered employers, employee earnings, NI thresholds, and ineligible business types are explained further in the subsections below.
The vast majority of our normal limited company contractor clients are not eligible for the Employment Allowance, but if you run a small business and employ a number of staff, then make sure you take a look at the eligibility criteria below because the Employment Allowance will most likely be ideal for you.
To be eligible for Employment Allowance, a business must be registered with HMRC as an employer. This registration is a prerequisite for claiming the allowance and ensures that the UK government can track and monitor the business’s compliance with tax regulations. This makes sense because you can only claim the employment allowance via your business payroll software.
Businesses must realize that meeting the criteria and paying Class 1 employer’s National Insurance Contributions qualifies them for Employment Allowance.
Employee Earnings and NI Thresholds
For a business to be eligible for the Employment Allowance, at least one employee must earn above the National Insurance secondary threshold. Below the Employers NIC secondary threshold, the rate of NIC’s due is 0%, and above the threshold this rate becomes 13.8%. The Secondary Threshold for the 2023/24 tax year is earnings of £175 per week, or £758 per month, or £9,100 per tax year.
Starting from 6 April 2016, Limited Companies in which the Director is the sole employee receiving wages above the Secondary Threshold for Class 1 National Insurance contributions are no longer eligible to claim Employment Allowance. This restriction underlines the need to comprehend employee earnings and NI thresholds when assessing eligibility for Employment Allowance.
Ineligible Business Types
Certain business types are not eligible for Employment Allowance. Self-employed sole traders, for instance, are ineligible because they pay Class 2 and Class 4 National Insurance Contributions (NICs) rather than Class 1 NICs. Personal and domestic workers, such as nannies and gardeners, are also not eligible as they are not deemed to be employed.
Businesses operating in the public sector with over 50% of their work in the public sector, as well as IR35/off-payroll workers, are not eligible for Employment Allowance. Being aware of these restrictions is a must for businesses to evade potential penalties and comply with Employment Allowance regulations.
Claiming Employment Allowance: A Step-by-Step Guide
Once a business has determined its eligibility for Employment Allowance, it is time to navigate the claiming process. This section offers a detailed guide to aid businesses in claiming Employment Allowance, using payroll software, submitting EPS to HMRC, and making claims for previous tax years if need be.
By understanding and following this guide, businesses can confidently apply for the Employment Allowance, ultimately benefiting from the financial advantages it provides. The process itself is actually very simple.
Using Payroll Software
Eligible businesses will find that making a claim for their Employment Allowance is easy. It can be done through their payroll software by automatically deducting Employer NI from the payroll. This subtraction occurs during the payroll process and is submitted to HMRC as part of the Real Time Information (RTI) submission. Remember, a business can only claim Employment Allowance against one payroll, even if it operates multiple payrolls.
Within your payroll software you will find the option to make a claim for the Employment Allowance. Its usually within the employer set-up page and is often just a checkbox.
For businesses with a maximum of ten employees, HMRC provides a free software solution called the Basic PAYE Tool to claim Employment Allowance. With the aid of this tool or their own payroll software, businesses can effortlessly claim the allowance and leverage the associated benefits.
Submitting EPS to HMRC
To claim the Employment Allowance, businesses must submit an Employment Payment Summary (EPS) to HMRC. The EPS is submitted to HMRC directly from your payroll software to apply any reductions to the amount owed from the Full Payment Submission (FPS), including the Employment Allowance.
Making an EPS submission from your accounting software is extremely simple. Some software providers will do this automatically, whereas others will require you to manually make the submission (usually just through clicking a button).
When using HMRC’s Basic PAYE Tools to claim Employment Allowance, businesses can follow these steps:
- Select ‘Change employer details’ after selecting the relevant name on the ‘Employer’ menu on the homepage.
- Choose ‘Yes’ in the ‘Employment Allowance indicator’ field.
- Submit the EPS.
Claiming for Previous Tax Years
Businesses can backdate their claims for Employment Allowance for the previous tax year and three years before that by submitting a separate EPS for each year. This option allows businesses to retroactively claim the allowance and enjoy the financial benefits it provides, even if they were not aware of their eligibility during the previous tax years.
To claim Employment Allowance for prior tax years, simply submit a separate EPS for each year. This process facilitates businesses to maximize their claim and leverage the financial relief provided by the Employment Allowance.
If your existing payroll software does not support this option, you can always download the HMRC Basic PAYE Tool and use that to make previous year claims.
Maintaining Records and Stopping Claims
Proper record-keeping and understanding the stopping claims process are essential for businesses that claim Employment Allowance. In this section, we discuss the importance of maintaining records for three years after claiming the allowance, as well as the process for stopping claims if necessary.
Sticking to these record-keeping requirements and stopping claims processes allow businesses to maintain compliance with Employment Allowance regulations and evade possible penalties.
Businesses that claim Employment Allowance must keep records of entitlement, amount, and liabilities for three years after claiming the allowance. These records should be kept in an order that complies with HMRC regulations.
Maintaining proper records is essential for demonstrating a valid claim for the allowance and ensuring compliance with Employment Allowance regulations. Maintaining these records helps businesses avoid potential penalties and facilitates a seamless claiming process.
Stopping Claims Process
In some cases, businesses may need to stop claiming Employment Allowance. Its a rare occurrence but nevertheless it might happen. To do so, they must inform HMRC of their intention by submitting an Employer Payment Summary (EPS). This process ensures that HMRC is aware of the business’s intention to stop claiming the allowance and can adjust their records accordingly. The process itself with vary between different payroll software providers, but it will usually involve unticking, or selecting “No”, in the employment allowance section.
Businesses need to be cognizant of the stopping claims process and adhere to the required steps if they need to cease claiming Employment Allowance. This ensures compliance with HMRC regulations and prevents potential penalties.
Do not select ‘No’ just because (a) you’ve reached the £5,000 limit before the end of the tax year – this does not make you ineligible, or (b) you’re no longer employing anyone – this allowance will stop at the end of the tax year anyway.
Penalties for Non-Compliance
Businesses that fail to adhere to the rules and regulations of Employment Allowance may be subject to penalties. These penalties may include fines, and interest charges. If HMRC identifies an invalid claim for the Employment Allowance, they will employ standard collection and recovery procedures to recoup any tax and NICs liabilities that have been incorrectly discharged.
To avoid these penalties, businesses must maintain proper records, submit accurate EPS submissions to HMRC, and follow the stopping claims process if necessary. Staying informed and adhering to Employment Allowance regulations allows businesses to reduce the risk of penalties and benefit from the financial respite the allowance offers.
How Employment Allowance Benefits Small Businesses
Employment Allowance provides valuable financial relief for small businesses, particularly during periods of economic instability or inflation. Employment Allowance aids small businesses in their growth and success in today’s competitive market by reducing employment costs, providing economic support, and amplifying competitiveness.
In the following subsections, we explore the various ways in which Employment Allowance benefits small businesses, including reduced employment costs, economic support, and increased competitiveness, all within the framework of de minimis state aid.
Reduced Employment Costs
Employment Allowance reduces Employer’s Class 1 National Insurance liability, lowering employment costs for small businesses. This reduction can result in significant savings for businesses of up to £5,000, allowing them to allocate resources to other areas such as investment, growth, or staff benefits.
By reducing employment costs, Employment Allowance enables small businesses to operate more efficiently and cost-effectively. This financial relief can be really important for businesses navigating economic challenges or seeking to expand their operations.
Employment Allowance provides financial relief for small businesses during periods of economic instability or inflation. This support can help businesses maintain stability and continue to operate despite economic challenges.
By reducing employment costs, Employment Allowance helps small businesses stay competitive in the market. This increased competitiveness can enable businesses to attract and retain skilled employees, invest in innovation, and improve overall operational efficiency.
Employment Allowance can play an important role in bolstering a business’s financial standing, enhancing competitiveness, and promoting long-term success. By understanding and claiming Employment Allowance, small businesses can capitalize on the financial relief it provides and thrive in today’s competitive market.
In conclusion, understanding Employment Allowance eligibility, claiming process, record-keeping requirements, and potential benefits is crucial for small businesses seeking to thrive in today’s competitive market. By staying informed and adhering to the guidelines outlined in this guide, businesses can ensure compliance with Employment Allowance regulations and enjoy the financial relief it provides. Armed with this knowledge, small business owners can confidently navigate the world of Employment Allowance and seize the opportunities it offers for growth and success.
Frequently Asked Questions
Who qualifies for employment allowance?
To qualify for employment allowance, you must be a registered employer with an HMRC PAYE reference number, and you must have Class 1 National Insurance liabilities of less than £100,000 in the previous tax year, along with at least one employee earning over the NIC secondary threshold. There are various exclusions also, which in most cases for our single director limited company clients means they are ineligible.
How much employment allowance can I claim?
You can claim up to £5,000 of Class 1 National Insurance Contributions (NICs) through the HMRC employment allowance for the 2023/24 tax year.
What is employment allowance?
Employment Allowance, a government scheme offered by HMRC, provides businesses with relief from their National Insurance contributions and offers a great financial boost to small companies. It acts as a credit, where eligible businesses get relief on the first £5,000 of employers NIC payments that are due.
Can a business backdate their claim for Employment Allowance?
Yes, businesses can backdate their claim for Employment Allowance for the previous four tax years. They can do so by submitting a separate EPS for each year.
What record-keeping requirements apply to businesses claiming Employment Allowance?
Businesses claiming Employment Allowance must keep records of entitlement, amounts, and liabilities for three years that comply with HMRC regulations. Generally speaking, using a compliant HMRC-approved payroll software will ensure this requirement is met.