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The decision to hire your first employee(s) for your small business is significant. In the UK, only 1.5 million private businesses employ at least one individual, compared to 4.1 million operating solo. A key factor in this decision is affordability, as hiring an employee involves more than just their salary, but also pension contributions, statutory pay, and national insurance. Understanding how to claim employment allowance can alleviate some of these costs.
Employment Allowance: An Overview
Introduced in 2014 by the UK government, employment allowance is a tax relief scheme supporting small businesses. It encourages business expansion by hiring employees, partially subsidizing Employer’s Class 1 National Insurance (NI) contributions. Employers are responsible for collecting ‘Primary’ Class 1 NI contributions from their employees’ earnings and paying ‘Secondary’ Class 1 NI for every employee earning over £175 a week. Claiming employment allowance contributes to secondary Class 1 NI.
Employment Allowance Amount
Since April 2022, employment allowance has increased to a maximum of £5,000. Businesses can claim employment allowance to cover any Employer’s NI up to this limit.
Qualifying for Employment Allowance
To be eligible, you must be an employer registered with HMRC and have a PAYE reference number. Your business should have at least one employee who earns above the NI threshold or have two directors earning above the threshold if you operate as a limited company. Furthermore, your Employer’s Class 1 NI liability must not exceed £100,000 in the previous tax year.
Ineligibility for Employment Allowance
Certain circumstances may render your business ineligible, such as over half of the business working in or for public sectors like local councils or the NHS. Additionally, employing freelancers or contractors who are not paid via the PAYE system or engaging in personal, household, or domestic work will not qualify your business for employment allowance.
Employment Allowance Mechanics: Employment allowance grants up to a £5,000 reduction from your Employer’s Class 1 NI liability. The allowance applies to your business as a whole, not each employee. It is deducted from your Employer’s Class 1 NI liability at each pay period until the £5,000 limit is exhausted.
Claiming Employment Allowance
The process of claiming employment allowance depends on your payroll software. If using your own software, select ‘yes’ for employment allowance when sending an Employment Payment Summary to HMRC. If your software lacks this field, use HMRC’s Basic PAYE Tool instead. There is no deadline for claiming employment allowance, but it is recommended to do so as soon as eligibility is established.
Missed Employment Allowance Claims
If you have been paying your Employer’s NI but could have claimed employment allowance, you can either request a refund at the end of the tax year or use it to offset next year’s liability. You can also make retrospective claims for up to the past four tax years by submitting separate Employment Payment Summaries for each year.
Employment Allowance and De Minimis State Aid
If your company sells goods or services, claiming employment allowance is considered de minimis state aid. It’s crucial to note that there’s a legal limit on the amount of state aid each company can receive, with €200,000 being the maximum amount for most industries over three years. Some sectors have lower limits. This limit applies to all businesses, regardless of their profit, and is especially significant for companies that claim R&D tax credits. If you need help with PAYE compliance and claiming employment allowances, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.