This article provides an overview of what you need to know about the Employment Allowance.
The Employment Allowance (EA) is a reduction of up to £3,000 per tax year of Employer’s National Insurance (NI) contributions for certain employers. As of 6th of April 2020, this amount will be increasing to £4,000. It is not a cash-back scheme; if you are eligible, it instead reduces your Employer’s NI payment every month until you reach the £3,000 allowance for that tax year.
Qualifying for the Employment Allowance
To qualify for the Employment Allowance, you must employ staff and pay wages, but you will not be eligible if you are a limited company director and the sole employee of your company (this is a change to the rules that was brought into effect on 6th April 2016). If you’re a sole trader or in partnership and don’t employ any staff, you don’t qualify because you and/or your partners aren’t employees, and any money you take out of the business isn’t subject to employer’s NI. From 6th April 2020 “de minimis” state aid rules will come into effect From this date, you also won’t qualify for EA if your employer’s NI bill is over £100,000 a year.
Some types of business don’t qualify for the Employment Allowance, even if they employ and pay staff. These are businesses that:
- have a single employee who is the limited director of the company
- employ domestic workers
- work more than 50% in the public sector
However, security guards and cleaners working in government buildings, and businesses working on IT contracts for governments do qualify for the Employment Allowance. Further information is available from gov.uk
How the Employment Allowance works in FreeAgent
The Employment Allowance eligibility status is sent to HMRC via the Employer Payment Summary EPS. No matter which eligibility status you select, if you’re using FreeAgent to file to HMRC, we will send your Employment Allowance eligibility status to HMRC every time you file.
If you use FreeAgent’s built-in payroll and are eligible for the Employment Allowance, to claim the allowance you just need to check a couple of boxes.
Select 'Settings' from the drop-down menu in the top-right corner and then select 'Payroll'.
On the Payroll page tick the ‘Claim Employment Allowance?’ checkbox and select ‘Save Changes’.
Alternatively, if you have been claiming Employment Allowance prior to April 2020 then you’ll be prompted to answer the additional “de-minimis” state aid question via a signpost on your payroll dashboard.
On the Payroll page check the ‘Claim Employment Allowance?’ checkbox, answer the “deminimis” state aid questions and select ‘Save Changes’.
FreeAgent then informs HMRC that you are eligible for the Employment Allowance when you file your next payroll, and automatically applies the reduction to your Employer’s National Insurance contributions.
Please note, the payroll screen will show the amount of employer's NI before deduction of the allowance.
FreeAgent will remember that you are eligible for the Employment Allowance, and, unless you uncheck this box, will apply the reduction to your Employer’s National Insurance contributions at the start of future tax years.
What happens if you no longer qualify
If you stop qualifying for the Employment Allowance at any point during the tax year (e.g. because your business starts to carry out more than 50% of its work in the public sector), you will need to notify HMRC and pay back the money you saved through the Employment Allowance for that tax year.
You can do this in FreeAgent by unticking the ‘Eligible for Employment Allowance?’ checkbox on the Payroll page and selecting ‘Save Changes’. When you file your next payroll, FreeAgent will inform HMRC that you are no longer eligible for the Employment Allowance. It will then adjust your Employer’s National Insurance contributions for that month so that you repay the Employment Allowance you claimed. Please note that HMRC require you to repay all of the allowance claimed for that tax year in one lump sum.
The exception is if you stop qualifying because a director becomes the only employee earning over the Secondary Threshold during the tax year, in which case you’re still entitled to claim the Employment Allowance until the end of that tax year. Remember to untick the box for the next year.