The Employment Allowance

This article provides an overview of what you need to know about the Employment Allowance. Further information is available from gov.uk.

The Employment Allowance (EA) is a reduction in the amount that certain businesses (employers) are due to pay to HMRC when employer’s National Insurance (NI) contributions have been calculated.

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 total allowance for that tax year.

The amount of employer's NI calculated will show on the summary page for each employee and on the payroll summary screen each month. The amount of Employment Allowance shows separately, and this reduces the amount due to HMRC.

Please note that FreeAgent's payroll functionality won't be available if you have an unincorporated landlord or non-UK account type, or if you're preparing your accounts using cash basis accounting.

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. 

Between 6th April 2020 and 5th April 2025 ‘de minimis’ state aid rules were in effect, also you didn't qualify for EA if your employer’s NI bill was over £100,000 a year. From 6th April 2025 this is no longer the case.

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 director of the limited 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.

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'.

In the Payroll scheme settings, select the ‘Claim’ option next to ‘Employment allowance’. Answer 'No economic activity' to the ‘de-minimis’ state aid question if you do not need to file payroll before 6th April 2025, as it only applies to payroll submissions between 6th April 2020 and 5th April 2025.

FreeAgent will then inform HMRC that you are eligible for the Employment Allowance when you file your next payroll, and will automatically apply the reduction to your employer’s NI contributions.

Please note that the payroll screen will record the amount of employer's NI due and then show the 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 NI contributions at the start of future tax years.

Claiming Employment Allowance during the payroll year

If you update the Payroll settings to ‘Claim’ Employment Allowance part way through the payroll year, FreeAgent will then show you are eligible for the Employment Allowance on your next monthly submission to HMRC. This will take into account the Employer NI for the entire payroll year.

Therefore, you'll likely find the first Employment Allowance claim is larger than the Employer NI that is due for the month, to take into account the Employer NI for the previous months.

Further information on when to claim is available from gov.uk.

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 selecting the ‘Don’t claim’ option next to ‘Employment allowance’ on the Payroll settings 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 NI contributions for that month so that you repay the Employment Allowance you claimed. Please note that HMRC requires 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.

For example, if you find you are no longer eligible during a tax year, here is a test payroll submission for Month 1 with Employment Allowance claimed.

As you can see, the Employment Allowance claimed is £273.80 and it shows this as a deduction which reduces the amount of PAYE/NI due to HMRC.

For month 2, the payroll settings have been updated so that 'Don't claim' Employment allowance is selected.

As such, the total amount of Employment Allowance claimed in the tax year so far will show as an addition to the PAYE/NI due to HMRC, meaning that any Employment Allowance claimed will have to be paid back.