The Employment Allowance allows certain businesses who employ workers to reduce their annual National Insurance (NI) bill by up to £5,000 (for 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 the Employment Allowance works
Eligible businesses can claim a reduction against their employers’ Class 1 NI liability up to a maximum of £5,000 each tax year. You can still claim the allowance if the liability was less than £5,000 in a tax year.
You can’t claim if you’re a company with only one employee paid above the Class 1 National Insurance Secondary Threshold (£9,100 for the 2023/24 and 2022/23 tax year) if that employee is also a director of the company.
Most self-employed freelancers and contractors (sole traders who pay Class 2 and Class 4 National Insurance) can’t use the allowance as they don’t pay Class 1 NI. In addition, you can’t claim the Employment Allowance if you:
- personally employ someone for domestic work (e.g. a nanny or gardener)
- carry out more than 50% of your work in or for the public sector.
There are some exceptions to the public sector rules, in particular, if you supply IT services for a government or local authority. You also may still be eligible if you provide security or cleaning services for a public building such as government or council offices. Further guidance on the eligibility criteria for employment allowance is available on the gov.uk website.
What are the rules of the Employment Allowance?
Unlike other HMRC giveaways (for example staff Christmas parties) which are one-time exemptions, the Employment Allowance is just that – an allowance. Eligible businesses may use up to the £5,000 limit every tax year. Employer NI is typically charged aat 13.8% for the 2023/24 tax year (14.73% for the 2022/23 tax year). You can find the various Employer NI rates on the gov.uk website. By way of example, a full-time employee with a salary of £22,000 will incur Employer NI of £148.35 per month or £1,780.20 per year.
This means a company with one employee (who is not also a director) paying a salary of £22,000 and claiming the Employment Allowance will not pay any Employer NI in the tax year as the full amount (£1,780.20) is within the £5,000 allowance.
By comparison, an employee paid £46,000 per year will generate £5,092.20 in Employer NI per year. By using the Employment Allowance, the first £5,000 can be written off, leaving £92.20 payable for the tax year.
Note that Employer NI above £5,000 will only be paid once the Employment Allowance has been exhausted, so in the example above you would pay no Employer NI for the first eleven months of the tax year, £92.20 in the twelfth month.
The Employment Allowance is a £5,000 allowance per business, not per employee.
How can I claim the Employment Allowance?
For eligible businesses, the Employment Allowance will be automatically subtracted from Employer NI by their payroll software. For Crunch clients using our payroll service and who are eligible, this will happen automatically.
Why aren’t the self-employed eligible for the Employment Allowance ?
Unfortunately, this is another government policy that overlooks the many sole trader freelancers and contractors. As self-employed sole traders pay Class 2 and Class 4 NICs, they’re not eligible for the Employment Allowance. Find out more about self-employed National Insurance in our article.