Increase in the Employment Allowance

The Employment Allowance is a tax relief which allows eligible businesses to reduce their National Insurance contributions bills each year. Businesses can claim this tax relief if their employer’s Class 1 National Insurance liabilities were less than £100,000 in the previous tax year.

Recently, the Employment Allowance was increased from £4,000 to £5,000 to add benefits to all SMEs. This new tax cut is worth up to £1,000 for nearly half a million small and medium-size businesses which amount to 30% of all businesses. The number includes around 50,000 businesses which will be taken out of paying NICs and the Health and Social Care Levy entirely.

Who is eligible?

You are eligible to claim the Employment Allowance if you’re a business, charity or a community amateur sports club and your employers’ Class 1 National Insurance liabilities were less than £100,000 in the previous tax year.

You can also claim this allowance if you employ a care or support worker.

The Employment Allowance can be claimed for the previous 4 tax years, dating back to the 2018 – 2019 tax year. Some of the rules for claiming are different.

If you’re part of a group

If you’re part of a group of charities or companies, the total employers’ Class 1 National Insurance liabilities for the group must be less than £100,000. Only one company in the group can claim this allowance.

If you have more than one payroll

If you have or had more than one employer PAYE reference, the total employers’ Class 1 National Insurance liabilities for your combined payrolls must be less than £100,000 in the previous tax year.

You can only claim the Employment Allowance against one of the payrolls.

If you make off-payroll payments

Payments to off-payroll workers such as contractors are known as ‘deemed payments’. Do not include employers’ Class 1 National Insurance liabilities on deemed payments in your calculations. They do not count towards the £100,000 threshold.

Check if de minimis state aid rules apply to you

If you make or sell goods or services, the Employment Allowance counts as ‘de minimis state aid’. There’s a limit to how much de minimis state aid you can get.

You must:

• check that you’re within the de minimis state aid threshold
• work out how much de minimis state aid you’ve received

You have to do this even if you don’t make any profit.

However, if you don’t make or sell goods or services, for example, if you’re a charity, an amateur sports club or if you employ a care worker, you don’t need to do that.

Check you’re within the de minimis state aid threshold

The Employment Allowance counts towards the total de minimis state aid you’re allowed to get over 3 years. You must make sure you won’t exceed the de minimis state aid threshold for your sector, which is noted below:

• Agriculture products sector €20,000 
• Fisheries and aquaculture sector €30,000 
• Road freight transport sector €100,000 
• Industrial sector / other €200,000 

Work out how much de minimis state aid you’ve received

1. Check if you’ve received any de minimis state aid – if so, it was told in writing.
2. Add the total amount of de minimis state aid that you’ve received or been allocated for the current and past 2 tax years.
3. Add this to the full amount of the Employment Allowance for the year you’re claiming for. You’ll need to convert this into euros using the exchange rate for the end of the previous tax year. If you’re claiming for 2020 – 2021 tax year, you’ll need to use the exchange rate on 30 March 2020: £1 to €1.1249.
4. If the total is below the threshold for your sector, you’re eligible to make a claim.

Example 1

In this example, the business is eligible to claim the Employment Allowance because the amount of de minimis state aid they received is below the sector threshold.

Claim year – 2020 to 2021

Sector – Agriculture

De minimis state aid 2018 to 2019 = €1,000

De minimis state aid 2019 to 2020 = €1,200

De minimis state aid 2020 to 2021 = €5,739 (this includes £4,000 of theEmployment Allowance converted into euros)

Total de minimis state aid = €7,939

The amount is under the €20,000 threshold for the agriculture sector.

Example 2

In this example, the business is not eligible to claim the Employment Allowance as the amount of de minimis state aid they received is above the sector threshold.

Claim year – 2021 to 2022

Sector – Agriculture

De minimis state aid 2019 to 2020 = €1,200

De minimis state aid 2020 to 2021 = €5,739 (this includes £4,000 of the Employment Allowance converted into euros)

De minimis state aid 2021 to 2022 = €15,439 (this includes £4,000 of the Employment Allowance converted into euros)

Total de minims state aid = €22,378

Threshold for agriculture sector = €20,000

This is above the €20,000 threshold for the agriculture sector.

If you’re a connected company, the total de minimis state aid for all of the companies in the group must be below the de minimis state aid threshold for your sector. The rules are different if your business covers more than one sector.

Who cannot claim Employment Allowance

You cannot claim if you’re a public body or business doing more than half your work in the public sector such as local councils and NHS services (unless you’re a charity).

You also cannot claim if both of the following apply:

• you’re a company with only one employee paid above the Class 1 National Insurance secondary threshold;
• the employee is also a director of the company.

Certain employees cannot be included in your claim, such as:

• someone whose earnings are within IR35 ‘off-payroll working rules’;
• someone you employ for personal, household or domestic work (for example a nanny or a gardener) – unless they’re a care or support worker.