What is HMRC's employment allowance?

HMRC's Employment Allowance is significant financial aid to businesses in the UK. An understanding of this allowance and the process of claiming can have a substantial impact on an enterprise's financial health.

What is HMRC's Employment Allowance?

HMRC's Employment Allowance is a government programme designed to reduce the financial burden of National Insurance contributions (‘NICs’) on employers. This allowance is a relief for businesses, regardless of their size, aiming to create a more favourable environment for economic growth. It provides immediate financial relief by eliminating the initial £5,000 of Class 1 NICs.

Who qualifies for Employment Allowance?

Understanding whether a business is eligible for Employment Allowance is crucial. The key eligibility requirements are:

‍- Having Employees: Eligibility hinges on having employees on the payroll. Importantly, even if a business employs just one person, it can qualify. This ensures that small enterprises can benefit from the allowance.

‍- Business or charity: The allowance isn't confined to profit-driven businesses; charities can also claim it. This broad coverage ensures that organisations focused on charitable work can reap the benefits.

‍- Threshold check: To qualify for the Employment Allowance, NICs liability should not exceed £100,000 in the previous tax year. However, this threshold is subject to change, making it advisable to check eligibility each year.

Here are some examples to illustrate different scenarios of eligibility:

‍Scenario 1:  Sandwich Shop

Its owner operates a small sandwich shop with three part-time employees. The total NICs liability for the tax year is £2,000, making the employer eligible for the Employment Allowance.

‍Scenario 2: Green Earth Foundation

Green Earth Foundation, a charity focused on environmental conservation, employs a team of 82 full-time workers. Unfortunately, with NIC's liability of £120,000 in the previous tax year, they don't qualify for the Employment Allowance due to exceeding the threshold.

How to claim Employment Allowance

Claiming HMRC's Employment Allowance is a straightforward process, provided eligibility criteria are met. The two primary methods are as follows:

‍- Through Payroll Software: Many businesses use payroll software to manage employee payments. As part of the onboarding process, payroll service providers should check the employers’ NIC liability and automatically apply the allowance if eligible.  

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- HMRC’s Online Services: If payroll software is not used, the allowance can be claimed directly through HMRC's online services. To do this:

- Create an account on HMRC's online platform

- Provide the required details

- HMRC will adjust NIC's liability accordingly

Reporting and compliance

Accurate record-keeping is essential to ensure a smooth and successful claim process. Records of employees, NIC payments and any other relevant documents should be maintained.

Once the Employment Allowance has been successfully claimed, businesses must shift focus to reporting and compliance. Reporting requirements entail the inclusion of the claimed Employment Allowance amount within the Employer Payment Summary (EPS). 

This serves as a vital tool to inform HMRC of the allocation and utilisation of the allowance, fostering transparency in financial management. HMRC retains the authority to audit claims and the need to adhere to rules and guidelines. Compliance is not a mere preference but a legal obligation, ensuring the business maintains good standing with the tax authority.

Record-keeping and documentation practices are critical, serving as the bedrock of both successful allowances claiming and comprehensive compliance. Keeping records of employee details, NIC payments, and documentation of all interactions and HMRC is fundamental in guaranteeing a compliant and legal process.

How does PayCaptain help?

Helping employers below the NICs threshold to claim Employment Allowance is standard functionality in PayCaptain.

PayCaptain will either automatically apply the allowance by looking at your employer NIC liability or, if onboarding mid-year, the team will ensure your previous provider has been claiming and check your eligibility.

In summary, HMRC's Employment Allowance is a valuable resource that can reduce the financial burden on businesses and charities in the UK. By understanding the eligibility criteria and the process of claiming this allowance, organisations can maximise their benefits. 

Reporting accurately and complying with HMRC regulations is equally important to ensure a smooth and successful experience. Whether a small business or a charitable organisation, claiming the Employment Allowance can make a positive difference to a business’s finances. 

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About the author: Payroll Manager Rebecca Davenport MCIPP has over 15 years’ experience in the payroll industry. Prior to joining PayCaptain in October 2022, Becky was Senior Payroll Manager for an international payroll service provider, where she was responsible for managing customer payroll implementations and services teams.