The Employment Allowance allows certain businesses in the UK who employ workers to reduce their annual National Insurance (NI) bill by up to £4,000. New rules on the types of businesses eligible to claim the reduction are being introduced for the 2020/21 tax year.
Eligibility for Employment Allowance from 6th April 2020
From 6th April 2020, the Employment Allowance will apply 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. For the 2020/21 tax year, the Employment Allowance is increasing to £4,000 (was £3,000 in the 2019/20 tax year).
The complete eligibility criteria for Employment Allowance can be found on the gov.uk website.
Eligibility for Employment Allowance until 5th April 2020
Until 5th April 2020, businesses can claim a reduction of up to £3,000 (for the 2019/20 tax year) in the amount of Class 1 National Insurance Contributions (NICs) they pay. Most freelancers and contractors (who pay Class 2 and Class 4 NICs) can’t use the allowance as they don’t pay Class 1 NICs. 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 council you may still be eligible. Or, if you provide security or cleaning services for a public building such as government or council offices. Further guidance on the new eligibility criteria for employment allowance is available on the gov.uk website.
What are the rules?
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 £4,000 limit every tax year.
Employer NICs are typically charged at 13.8% (you can find the various Employer NIC rates on the gov.uk website) but a full-time employee with a salary of £22,000 will incur Employer NICs of £151.94 per month or £1,823.26 per year.
This means a company with one employee paid £22,000 and claiming the Employment Allowance will not pay any Employer NICs in the tax year as the full amount (£1,823.26) is within the £4,000 allowance.
By comparison, an employee paid £43,000 per year will generate £4,721.26 in Employer NICs per year. By using the Employment Allowance, the first £4,000 can be written off, leaving £721.26 payable for the tax year.
Note that Employer NICs above £4,000 will only be paid once the Employment Allowance has been exhausted, so in the example above you would pay no Employer NICs for the first ten months of the tax year, £327.84 in the eleventh month and £393.42 for the twelfth month to total £721.26.
The Employment Allowance is a £4,000 allowance per business, not per employee.
How can I claim the Allowance?
For eligible businesses, the Employment Allowance will be automatically subtracted from Employer NICs 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?
Unfortunately, this is another government policy that overlooks freelancers and contractors. As the self-employed 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.