The Employment Allowance allows certain businesses in the UK who employ workers to reduce their annual National Insurance Contributions by up to £3,000. New rules on the types of businesses eligible to claim the reduction are due to be introduced for the 2020/21 tax year.
Eligibility until 5th April 2020
Until 5th April 2020, businesses can claim a reduction 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 eligibility 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 £3,000 limit every tax year. Employer NICs are charged at various rates, but a full-time employee with a salary of £22,000 will incur Employer NICs of £156.12 per month or £1,873.49 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 (£1,873.49) is within the £3,000 allowance.
By comparison, an employee paid £35,000 per year will generate £3,667.44 in Employer NICs per year. By using the Employment Allowance, the first £3,000 can be written off, leaving £667.49 payable for the tax year.
Note that Employer NICs above £3,000 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 nine months of the tax year, £56.20 in the tenth month, and £305.62 for the eleventh and twelfth months to total £667.44.
The Employment Allowance is a £3,000 allowance per business, not per employee.
Eligibility after 6th April 2020
From 6th April 2020, the Employment Allowance will apply to smaller businesses only. Businesses with an Employer NIC bill of £100,000 or more in the previous tax year will not be able to claim the £3,000 allowance.
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.