We recently started running payroll for a new client that had claimed Employment Allowance for the tax year 2020-2021, but for some inextricable reason had not claimed for 2021-2022, and because of this oversight, also wouldn’t be claiming for 2022-2023.
As is our standard practice, we had undertaken a forensic assessment of the client’s payroll, prior to commencing processing, where we discovered this omission. (We do this to ensure that there are no previous errors and all the company’s payroll details are correct and compliant).
This oversight was losing the company £4,000 for the tax year 2021-2022 and £5,000 for the tax year 2022-2023. Luckily, this allowance can be backdated 4 years, so we were able to complete a return to claim the allowance, for both years, and reimburse the client with £9,000.
Needless to say, the client is overjoyed not only because of the monetary windfall, but they know that their payroll will now be done correctly moving forward and any subsequent claims will be done automatically.
So, what is Employment Allowance?
The Government set up the Employment Allowance Scheme in 2014, to help small businesses with their cashflow and motivate them to employ more people. The scheme provides eligible small businesses, with more than one employee, to reduce their annual Class 1 National Insurance bill. Each Tax Year Employers can Claim a reduction in their Class 1 National Insurance Liability.
Employment Allowance Rates:
| Tax Year | Maximum Employment Allowance Rate |
| 2014/2015 | £2,000 |
| 2015/2016 | £2,000 |
| 2016/2017 | £3,000 |
| 2017/2018 | £3,000 |
| 2018/2019 | £3,000 |
| 2019/2020 | £3,000 |
| 2020/2021 | £4,000 |
| 2021/2022 | £4,000 |
| 2022/2023 | £5,000 |
Who can apply:
Every business that has one or more employees liable for Class 1 National Insurance contributions is eligible for this allowance. However, only businesses that have a Class 1 National Insurance liability of less than £100,000 for the previous tax year are eligible.
Also note that employment allowance does not include contributions where IR35 applies. So, employers will not be able to claim for external employees, such as contractors, consultants, for example, that would not be paid through the regular business payroll. These workers would not count towards the threshold of £100,000 for the previous tax year either.
How does it work:
The Allowance is based upon the employer’s annual Class 1 National Insurance contribution to the Government. The current allowance is £5,000. This means that a business can claim up to this amount before they have any Class 1 National Insurance liability.
As an example, if a company has a Class 1 National Insurance Liability of £7,500, and they are eligible for the allowance, then their liability will be reduced to £2,500. If their Class 1 National Insurance Liability is £3,500, then they would be able to claim the whole amount and have no Class 1 National Insurance liability to pay.
For Companies with more than one payroll, they would only be eligible to claim for one companies’ liability within the group.
Once a company has registered for this allowance, during the current tax year the employer would not have any Class 1 National Insurance to pay until the Allowance has been fully utilised. Employer contributions will only kick in, at this stage, and the full Class 1 National Insurance will then have to be paid for the remainder of the year.
When can I apply for this:
All eligible businesses can apply for this allowance every year and it can be claimed at any point during the tax year. Not only that, claims can be backdated for up to four years, as long as you have an Employer Payment Summary (EPS) for each of the years you wish to claim for.
Claims are usually made as part of a company’s Real Time Information submission, although claims may depend on the type of payroll software you are using and whether you are using the basic PAYE Tools provide by HMRC.
Most payroll software should have a field for employment allowance, so it will be a quick tick of a box when preparing the next Employer Payment Summary submission to HMRC. If your software does not include this field then you can still utilise the Basic PAYE Tools from HMRC.
Exceptions:
Companies with a single employee ie: Company Director earning a salary over the secondary threshold for Class 1 National Insurance Contributions. (for 2022/2033 Tax Year this is £175 per week)
Any company where 50% of work takes place in the public sector, some exceptions include cleaning or security for local authorities or government or companies supplying IT services.
If you employ anyone for personal domestic work, such as gardeners or nannies.
This is only one example of why using a payroll specialist can save companies money. If you do not keep up with government legislation, allowances and the many changes that are imposed on a regular basis you could be losing out or risking massive fines.
Please call JLP Payroll Services if you have any questions or if you need any other help and advice with your payroll, we’re here to make your life easier!
