Understanding employment allowance for employers is crucial to reducing your company’s National Insurance contributions, potentially saving up to £5,000 annually.
What is employment allowance for employers?
Employment allowance allows eligible employers to reduce the amount of employer’s National Insurance they pay across to HMRC by up to £5,000 per annum. The employment allowance is applied to your Employer’s Class 1 National Insurance charges from April (month 1) in each tax year, until you reach the limit of £5,000 or the end of the tax year (if your National Insurance bill is less than £5,000).
You can see the amount of employment allowance applied each month by logging into the company’s PAYE government gateway account.
Eligible businesses are those with less than £100,000 Employer’s Class 1 National Insurance charges in the previous tax year. For businesses who are part of a group, this £100,000 threshold applies to the group as a whole. Businesses, with only one employee who is also a director of the company, are also not eligible. There are some companies which are not eligible due to the level of public sector work they complete, or the level of state aid they receive. A full list of the eligibility criteria can be found using the link below.
https://www.gov.uk/claim-employment-allowance/eligibility
How do I claim employment allowance for employers?
Please ensure that you check your payroll settings in Xero at the start of the tax year each year, to ensure the employment allowance is being claimed.
Go to settings/ payroll settings/ HMRC. You should see the employment allowance claim box ticked, as shown below. If it is not ticked and you are eligible, please tick the box and the employment allowance will be applied to the remaining months of the tax year.
What if I haven’t claimed employment allowance previous years?
It is important to check that the Xero payroll settings are correct in order to claim the allowance each year, and therefore it is worth setting a reminder for this. If you discover that you have missed claiming the employment allowance in a previous year, you can claim for the previous 4 tax years. This can be done by contacting HMRC or by downloading the free basic tools software from HMRC
Previous employment allowance rates were £3,000 up to the 2019/2020 tax year, and £4,000 for the 2020/2021 and 2021/2022 tax years.
By effectively claiming the employment allowance for employers, you can optimise your business’s financial resources, ensuring you benefit from the full relief available.
If you have any other accounting questions, reach out to our expert accounting team for tailored advice.