What is Employment Allowance-check if you're eligible

The HMRC Employment Allowance helps eligible employers to reduce their annual National Insurance cost.

In the Autumn Budget 2024, changes were announced to the Employment Allowance eligibility threshold and the maximum amount you can save in Employer’s National Insurance from the tax year 2025/26, so employers should check their eligibility and the new rules.

In this blog, we will explain the Employment Allowance, what it is, why it is beneficial to your business, how it impacts on Employer’s National Insurance, how to claim the Employment Allowance and the changes to the criteria announced in the Autumn Budget 2024.

What is Employment Allowance?

Employment Allowance is a UK government initiative designed to reduce a company’s annual Employer’s National Insurance liability by up to £5,000 (rising to savings of up to £10,500 on annual National Insurance contributions in tax year 2025/26).

You’ll pay less employers’ Class 1 National Insurance each time you run your payroll until the £5,000 (£10,500 in 2025/26) has gone or the tax year ends (whichever is sooner).

You can still claim the allowance if your liability was less than £5,000 a year (£10,500 in 2025/26 tax year).

Eligibility criteria

To be eligible for Employment Allowance, the following criteria apply:

• You must be a business or charity (including community amateur sports clubs).

• Your business must have had a Class 1 National Insurance liability of less than £100,000 in the previous tax year. (This exclusion is lifted from 2025/26 tax year, meaning that businesses with National Insurance Contributions above £100,000 could still be eligible for the Employment Allowance).

If your company is part of a group

If your company is part of a group of companies (known as ’connected companies’, then the employers’ Class 1 National Insurance liabilities for the group must be less than £100,000. (Note: Only one company in the group can claim the allowance).

If you have multiple payrolls

If your company has had more than one employer PAYE reference and run multiple PAYE schemes, then you will only be eligible if the total employers’ Class 1 National Insurance liabilities for your combined payrolls is less than £100,000 in the previous tax year. (This upper limited is abolished from 2025/26 year onwards) Note: You can only claim Employment Allowance against one of the payrolls.

If you make off-payroll payments

If you pay off-payroll workers (e.g. contractors) then these payments are known as ‘deemed payments’. Deemed payments should not be in your calculations as they do not count towards the current £100,000 threshold in 2024/25 tax year.

Exceptions to eligibility for Employment Allowance

Some businesses and organisations are excluded from claiming Employment Allowance. You can not claim Employment Allowance if any of the following apply:

• You run a company with only one director and no other employees.

• Your business exceeded the £100,000 NIC threshold in the previous tax year. (From 2025/26 tax year this £100,000 threshold is abolished, meaning employers with Class 1 National Insurance Contributions above £100,000 in the previous tax year could be eligible for Employment Allowance).

• You’re a public body or business doing more than half your work in for public sector organisations (such as local councils and NHS services) - unless you’re a charity.

Employees you cannot include in your Employment Allowance claim

Some 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 (like a nanny or gardener) - unless they’re a care or support worker

De minimis state aid

For some businesses, Employment Allowance counts as ‘de minimis state aid’ (financial support from the government). There’s a limit to how much de minimis state aid these businesses can get over a 3-year period. If they exceed the limit, they cannot claim Employment Allowance. Find out more information about de minimis state aid rules here.

Changes to Employment Allowance announced in Autumn Budget 2024

Under the rules in 2024, a business will pay less Class 1 National Insurance at every payroll until it has reached £5,000 or until the tax year ends (whichever is sooner).

To support small businesses, it was announced that the government is increasing the Employment Allowance from £5,000 to £10,500 for tax year 2025/26 onwards.

It was also announced that the £100,000 threshold would be removed from 2025/26 tax year expanding this valuable allowance to all eligible employers. This means that 865,000 employers will pay no NICs from April 2025.

How do I claim Employment Allowance?

Claiming Employment Allowance is fairly easy for eligible businesses if they run payroll electronically.

You can claim Employment Allowance through your own payroll software, your outsourced payroll provider and their software or by using HMRC’s Basic PAYE tools.

Include the employment allowance in your Real Time Information (RTI) submission to HMRC to claim it via your own software.

To claim through your payroll software, put ‘Yes’ in the ‘Employment Allowance indicator’ field next time you send an Employment Payment Summary (EPS) to HM Revenue and Customs (HMRC).

If your own payroll software does not have an Employment Payment Summary field, you can use HMRC’s Basic PAYE Tools. If you use HMRC’s Basic PAYE tools, simply do the following:

1. Select the correct name in the ‘Employer’ menu on the home page.

2. Select ‘Change employer details’.

3. Select ‘Yes’ in the ‘Employment Allowance indicator’ field.

4. Answer ‘Yes’ to the ‘Do state aid rules apply?’ question if de minimis state aid rules apply to you. Then select the business sectors that apply to you. Otherwise, answer ‘No’ and select ‘State aid rules do not apply’.

5. Send your EPS as normal.

If you stop being eligible, select ‘No’ in the ‘Employment Allowance indicator’ field in your next EPS.

You may stop being eligible if you’ve reached the limit before the end of the tax year or you no longer employ anyone.

What happens if my Employment Allowance claim is rejected?

If you’re eligible for Employment Allowance but your claim is rejected, you’ll need to call HMRC’s Employer Helpline.

Monitoring your Employment Allowance

It’s important to manage the use of your Employment Allowance. Most payroll software or your payroll provider will be able to easily track this for you and should show you the remaining balance after each payroll run.

When do I claim Employment Allowance?

You need to claim Employment Allowance every tax year. However, you can claim at any time during a tax year.

If you claim late and do not use your Employment Allowance against your employers’ Class 1 National Insurance liabilities, you will need to contact HMRC. You should ask them to use the unclaimed allowance at the end of the year to pay any tax or NI you owe (it can be deducted from your VAT or Corporation Tax bill if you do not owe any PAYE).

HMRC can also issue a refund if you do not owe any PAYE, VAT or Corporation Tax.

Claiming Employment Allowance for previous tax years

If your business was eligible for Employment Allowance in previous years but didn’t claim it, you can claim for up to the previous four tax years, dating back to the 2020 to 2021 tax year. For the tax years 2020 to 2021 and 2021 to 2022, it does not matter how much your employers’ Class 1 National Insurance liability was.

For backdated claims, you’ll receive a refund or credit toward outstanding National Insurance liabilities, depending on the amounts owed.

Summary

Employment Allowance is a valuable financial relief that can help businesses and charities to ease the financial burden of employing people. The Employment Allowance reduces employment costs, National Insurance Contributions and can boost your business cash flow and profit.

Business owners that employ people should understand the eligibility criteria, claiming process, and impact on payroll, so you can make the most of this government initiative.

Using an outsourced payroll service from dns accountants can avoid any issues with the Employment Allowance as we can manage the whole payroll process for you, provide payroll software and advise on Employment Allowance eligibility.

For more help and advice on payroll, Employer’s National Insurance, off-payroll workers or any other payroll questions you may have contact us today at 033 0088 3616, email contact@dnsaccountants.co.uk or book a free consultation.

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