Employment Allowance: what you need to know

Employment Allowance is a valuable relief that was designed to support smaller businesses and charities in the UK with their employment costs, enabling them to reduce their annual National Insurance liability. This blog explores Employment Allowance, including eligibility, how to claim and other considerations.

Expansion of the benefit and removal of the liability cap, announced in the Autumn 2024 Budget, will partly mitigate the impact of the higher employers’ NI rate, particularly for smaller employers.

What is Employment Allowance?

Employment Allowance enables eligible employers to reduce their annual Class 1 National Insurance contributions (NICs) by up to £5,000 for the 2024/25 tax year.

For example, if your Class 1 NICs amount to £7,500, you will only need to pay the excess of £2,500 to HMRC.

The amount is set to increase to £10,500 in April 2025, as announced by Chancellor Rachel Reeves in the Autumn 2024 Budget.

Who is eligible for Employment Allowance?

Many more employers will be eligible from April 2025.

To qualify for Employment Allowance, you must be:

• Registered as an employer.
• A business or charity (including community amateur sports club) or employers of care / support workers.

Additionally:

• Until March 2025, you must have paid employers’ Class 1 National Insurance liabilities of less than £100,000 in the previous tax year (payments to off-payroll workers do not count towards the £100,000 NICs threshold).
• If you’re a limited company that employs only directors, there must be two or more directors earning more than the secondary threshold for Class 1 National Insurance contributions.
• If your business or charity is part of a group (also known as connected companies), the total Class 1 National Insurance liabilities for the group must be below £100,000 and only one company in the group can claim the allowance.
• If you have, or had, more than one employer PAYE reference, you can only claim the allowance against one of the payrolls and, similarly, the total Class 1 National Insurance liabilities for your combined payrolls must be less than £100,000 in the previous tax year.
• The £100,000 liability cap is removed from April 2025, making more businesses and charities eligible.

What are connected companies?

The general rule for deciding if companies are connected is that either one of them has control of the other, or both are under the control of the same person or persons.

If, at the start of the tax year, two or more companies are connected, the companies will be treated as being connected for Employment Allowance purposes for the remainder of the tax year, regardless of any later change of circumstance in that year.

How to claim?

Claiming the Employment Allowance is fairly straightforward and can be done at any point during the tax year as part of your Real Time Information (RTI) submission to HMRC.

It’s not an automatic process and so you’ll need to inform HMRC that you qualify and want to claim, during each tax year.

The allowance will be deducted against the employer NICs bill for each month until the limit has been reached. Left over relief cannot be carried forward to the next tax year.

And lastly, if you’re no longer eligible for the allowance, you’ll be required to make repayments.

Can I claim Employment Allowance for previous tax years?

Yes, you can! You can make a claim for the Employment Allowance up to four years after the end of the tax year in which the allowance applies. For example, if you want to make a claim for the tax year 2020 to 2021, you must make your claim no later than 5 April 2025.

The amount of the Employment Allowance has changed between tax years.

• Tax years 2020/2021 to 2021/2022 - £4,000
• Tax years 2022/23 to 2023/24 - £5,000
• From April 2025 - £10,500

If you make a claim over a year since the tax year ends, and your tax payments are up to date, HMRC will either set your repayment against any future liabilities or refund the amount, if you ask.

Employment Allowance is a useful relief that can help reduce the financial burden of National Insurance contributions for eligible employers. By understanding the eligibility criteria and how to claim, businesses and charities can make the most of this allowance and reduce their employment costs each tax year.

Need help?

If you’d like to discuss any of this further, please get in touch with your usual contact. You can find contact details on the Our People section of the Larking Gowen website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Jordan Stewart