What Is Employment Allowance and Who Is Eligible?

Employment Allowance is a government initiative designed to provide financial relief to eligible employers by reducing their National Insurance contributions. This measure aims to support businesses and charities, helping to ease the financial burden associated with employing staff. It helps employers manage their payroll costs more effectively.

Understanding Employment Allowance

The Employment Allowance permits eligible employers to reduce their annual employer Class 1 National Insurance Contributions (NICs) liability. This is not a cash payment or grant, but a deduction applied directly to the employer’s NICs bill. For the 2024/2025 tax year, the maximum value of this allowance is £5,000, increasing to £10,500 from April 2025.

The allowance operates by reducing employer Class 1 NICs paid each time payroll is run, continuing until the full allowance for the tax year is utilized or the tax year concludes. If an employer’s total Class 1 NICs liability is less than the maximum allowance, they can still benefit up to their total liability, reducing their bill to zero. The allowance applies per business, not per employee, and cannot be carried over to the next tax year if not fully used.

Eligibility for Employment Allowance

To qualify for Employment Allowance, an employer must be registered and have employees for whom they pay employer Class 1 National Insurance Contributions. Businesses and charities are generally eligible, provided they meet specific criteria. For instance, if a company has only one director, they cannot be the sole employee earning above the Class 1 National Insurance Secondary Threshold for the company to be eligible.

Until April 2025, employers whose total Class 1 National Insurance liabilities exceeded £100,000 in the previous tax year were not eligible. This restriction will be removed from April 2025, expanding eligibility to more employers. Special rules apply to employers of domestic staff, such as nannies or gardeners, who are typically not eligible unless the employee is a care or support worker.

The allowance also falls under ‘de minimis state aid’ rules for businesses that make or sell goods or services. This means there is a limit to the total amount of government financial support a business can receive over a three-year period. Connected companies or groups must share a single allowance, with only one company in the group able to make the claim for the entire tax year.

Claiming Employment Allowance

Claiming the Employment Allowance is typically done through an employer’s payroll software. When processing payroll, employers usually need to select an option or tick a box indicating their intent to claim the allowance. This action signals to Her Majesty’s Revenue and Customs (HMRC) that the employer wishes to utilize the allowance.

The claim is communicated to HMRC primarily via the Employer Payment Summary (EPS) submission, which is part of the Real Time Information (RTI) system. This EPS submission informs HMRC of adjustments to the payments due, including the Employment Allowance claim. Once the claim is submitted, the allowance immediately begins to reduce the employer’s Class 1 NICs liability in real-time as payroll is processed.

The allowance continues to offset the NICs bill until the maximum amount is reached for the tax year. Employers must reconfirm their eligibility and claim the allowance each tax year. If an employer realizes they were eligible but did not claim in a previous year, they can backdate claims for up to four prior tax years by submitting a separate EPS for each relevant year.