‍The Employment Allowance allows certain businesses who employ workers to reduce their annual National Insurance (NI) bill by up to £5,000 for 2024/25 (and the 2023/24 tax year).

The Employment Allowance applies to smaller businesses only. Businesses with an Employer NI bill of £100,000 or more in the previous tax year will not be able to claim the allowance.

How does the Employment Allowance work?

Eligible businesses can claim a reduction of up to £5,000 against their employers’ Class 1 NI liability each tax year. If the liability is less than £5,000, the full amount can still be claimed. However, businesses with only one employee, who is a director earning above the Class 1 National Insurance Secondary Threshold (£9,568 for 2024/25), are not eligible.

Self-employed freelancers and contractors who pay Class 2 and Class 4 National Insurance typically cannot claim the allowance. Additionally, you cannot claim the Employment Allowance if:

• You employ someone for domestic work (e.g., a nanny or gardener).
• Over 50% of your work is in or for the public sector, with certain exceptions for IT services, security, or cleaning for public buildings.

Eligibility examples:

Limited companies, charities, and community amateur sports clubs can often claim the Employment Allowance, but connected companies and charities must share a single £5,000 allowance.

Further guidance on the eligibility criteria for employment allowance is available on the gov.uk website.

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What are the rules of the Employment Allowance?

Unlike one-time exemptions (such as staff Christmas parties), the Employment Allowance is an ongoing benefit. Eligible businesses can use up to the £5,000 allowance every tax year. Employer NI is typically charged at 13.8% for the 2024/25 tax year.

For example, a company with one employee earning £22,000 annually would incur Employer NI of £1,813.60 per year. Claiming the Employment Allowance would eliminate this cost for the year. Comparatively, for an employee earning £46,000 per year, Employer NI would be £5,201.20. Using the allowance would leave £201.20 payable after the first £5,000 is covered.

Annual reassessment: 

Businesses should reassess their eligibility each tax year, particularly if their financial or operational circumstances have changed, such as growth in employee numbers or revenue.

How to claim the Employment Allowance

Eligible businesses can claim the Employment Allowance through their payroll software, which will automatically deduct the allowance from Employer NI contributions. For Crunch clients, this process is automated if they qualify.

Claim process specifics: 

The exact steps to claim can vary depending on your payroll software, but typically it involves selecting the option to claim the Employment Allowance within the payroll system and confirming eligibility. The allowance will then apply until the £5,000 limit is reached. Expect to see the reduction in your Employer NI contributions in the subsequent payroll cycle.

Why the self-employed aren’t eligible

Unfortunately, the self-employed, including sole traders and contractors, are not eligible for the Employment Allowance because they pay Class 2 and Class 4 NICs instead of Class 1.

Impact on marginal businesses: 

For small businesses with tight profit margins, the Employment Allowance can make a significant difference. The savings can be reinvested into the business, allowing for growth, additional hiring, or improved cash flow.

Leveraging  the Benefits of the Employment Allowance

The Employment Allowance is a valuable benefit for eligible small businesses, allowing them to reduce their National Insurance bill by up to £5,000 annually. It helps ease financial pressures, enabling reinvestment into the business. 

However, businesses need to reassess their eligibility each tax year, particularly if circumstances change. While the self-employed are not eligible, many other business types can claim this allowance through their payroll systems. 

Taking advantage of this allowance can lead to significant savings, improving cash flow and supporting growth.

Useful Further Resources

If you're unsure whether your business qualifies for the Employment Allowance, consult the HMRC guidelines, or speak with an accountant who can provide tailored expert advice.