How the employment allowance benefits small businesses

The ‘Employment Allowance’ can save employers up to £5,000 of employer’s class 1 national insurance contributions per year on employees’ earnings.  It is important to point out here that employer’s class 1 national insurance is a direct cost to employers on top of an employee’s gross salary and this is therefore a very valuable tax break for small businesses.

The allowance is available to businesses or charities with one or more employees and that had a class 1 National Insurance liability of less than £100,000 in the previous tax year.  There are specific rules for groups of companies and charities under common control as well as for employers running more than one PAYE scheme so that the employment allowance is only available once.  Certain employers such as nannies and single-director companies cannot claim the allowance.

The allowance can be offset against the employer’s national insurance liability each week or month until the full £5,000 is used up.  This could mean that some employer’s will benefit from the full £5,000 allowance in the first month of the tax year while other smaller employers will benefit gradually throughout the year.

The allowance cannot be used against any other tax and PAYE liabilities such as employees’ national insurance or income tax.

Claiming the allowance is straightforward and can be done on either HMRC’s Basic PAYE Tools or via payroll software. Backdated claims for the allowance can be made for the 4 previous tax years, dating back to the 2018-19 tax year, though the rules and amount of allowance in those years differed from the current rules.