For the tax year 2022–2023, the Employment Allowance enables some firms with employees to pay up to £5,000 less in annual National Insurance (NI) contributions.
Only smaller firms are eligible for the Employment Allowance. Businesses that owed at least £100,000 in Employer NI during the preceding tax year are not eligible to use the allowance.
How Employment Allowance functions
Businesses that qualify may request a reduction of up to £5,000 each tax year from their employers’ Class 1 NI liability. If your liability for a tax year was less than £5,000, you can still claim the allowance.
If an employee is also a director of the firm, you are not eligible to file a claim if your company has just one employee who is paid more than the Class 1 National Insurance Secondary Threshold (£9,100 for the 2022–23 tax year, up from £8,840 for the 2021/22 tax year).
Since they do not pay Class 1 NI, the majority of self-employed freelancers and contractors (sole proprietors who pay Class 2 and Class 4 National Insurance) are not eligible to utilise the allowance. Additionally, you are ineligible to receive the Employment Allowance if you:
More than 50% of your work must be done in or for the public sector, or you must directly hire someone to undertake household chores (like a nanny or gardener).
The public sector regulations have some exclusions, particularly if you provide IT services to a government or local body. Additionally, you can still be qualified if you work as a security or cleaning service for a public building, such as a council or governmental office. On the gov.uk website, you may find additional information about the requirements for eligibility for the employment allowance.
What are the rules of the Employment Allowance?
The Employment Allowance is an allowance, not a one-time exemption like certain other HMRC gifts (like staff Christmas parties). The £5,000 cap is available to eligible firms each tax year. Employer NI is usually assessed at a rate of 15.05%. On the gov.uk website, you can find the various Employer NI rates. For illustration, a full-time worker making £22,000 will pay £161.79 in employer national insurance each month or £1,941.45 annually.
Because the entire sum (£1,941.45) is under the £5,000 allowance, a business with one employee (who is not also a director) paying a salary of £22,000 and claiming the Employment Allowance will not have to pay any Employer NI in the tax year.
Comparatively, an employee earning £43,000 annually will produce £5,101.95 in Employer NI annually. The first £5,000 can be written off using the Employment Allowance, leaving only $101.95 due for the tax year.
In the example above, you would pay no Employer NI for the first eleven months of the tax year, and then £101.95 in the twelfth month, because Employer NI over £5,000 will only be paid if the Employment Allowance has been spent.
The Employment Allowance is a £5,000 grant that is given to businesses, not individuals.
How can I submit a request for Employment Allowance?
The Employment Allowance will be automatically deducted from Employer NI for qualified enterprises via their payroll software. This will take place automatically for clients who are qualified and who utilize our payroll services.
Why are independent contractors not eligible for Employment Allowance?
Unfortunately, this is yet another government regulation that ignores a large number of independent contractors and sole proprietors. Self-employed sole traders are ineligible for the Employment Allowance because they are required to pay Class 2 and Class 4 NICs. In our post, we provide further information on self-employed National Insurance.
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