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Employment allowance

In 2014, the government introduced employment allowance, giving most companies the chance to reduce their employer class 1 national insurance (NI) contributions. On 6 April 2016, the employment allowance increased to £3,000. Businesses with a sole employee who is also a director are not eligible for employment allowance. Most other businesses can claim it.

The employment allowance remains at £3,000 in the 2019/2020 tax year. If you’re unsure whether or not you’re eligible for employment allowance, you must speak to HMRC.

Payroll handles the allowance claim automatically, all you need to do is specify whether you qualify when you record your payment to HMRC. The amount you can claim is then offset against your liability to HMRC. The first time you claim employment allowance, you also need to submit an employer payment summary (EPS) to let HMRC know.

The employment allowance is applied in full to the contributions each month or quarter, until it is exhausted.

Who qualifies?

Most employers qualify for the NI employment allowance, including businesses, charities and community amateur sports clubs. If your business is part of a group of companies, only one company can claim the allowance.

If you’re eligible for employment allowance and your business has multiple PAYE schemes, you can only claim for one PAYE scheme. To ensure that you can claim the most of your allowance, you should pick a scheme where you think you employer Class 1 NI liability will most likely amount to at least the annual employment allowance amount. You must advise HMRC which scheme you’re claiming employment allowance for.

For more information and guidance on employment allowance, visit the HMRC website.

Claim employment allowance for the current tax year

You must process all pay runs and submit your full payment submission (FPS) for your first P32 reporting period before you can claim employment allowance.

  • 1. Complete all pay runs for month one or quarter one.
  • 2. Go to Summary, then click Record Payment / EPS.
  • 3. On the Eligible for NI Employment Allowance list, click Yes.

You must leave this as Yes for the full tax year. If you change it to No, HMRC thinks you’re not entitled to employment allowance and you must repay any amount you’ve claimed.

The amount you need to pay to HMRC automatically reduces by the amount you can claim. You can also select whether you’re eligible for small employer’s relief in the EPS submission.

  • 4. Enter payment date, then click Next.
  • 5. If applicable, enter any CIS deductions suffered, then click Next.
  • 6. Enter your Government Gateway credentials, if not already saved.
  • 7. Click Submit.

You’ve successfully claimed employment allowance. Each month your liability to HMRC automatically reduces, until you claim the full allowance.

You can view and keep track of your employment allowance from within the Pay Runs tab:

  • Click the relevant pay run, then click P32 Employer Payment Record.

This report shows how your liability is offset by the employment allowance. You can also see how much you have left to claim from the amount carried forward.

Please note that if you claim Employment Allowance part way through the tax year, this may cause your PAYE liability to be reduced on top of employer’s NI.This usually happens if you are too far into the tax year to claim the full £3000 relief on employer’s NI alone.

To claim employment allowance for previous tax years

For advice about this, please contact HMRC. They’ll be able to use any unclaimed allowance against any outstanding payments or offer you a refund.

You cannot use Payroll to reclaim previous tax year allowances.

If you claim employment allowance in error

If you claim employment allowance in error, some of your employer NI contributions may be offset by the allowance when they shouldn’t be. If this happens, you must repay the allowance you claimed by mistake.

If you have any queries on whether to repay the allowance or not, you should contact HMRC on 0300 200 3500.

To repay the allowance when you submit your next EPS, you should choose No from the Eligible for NI Employment Allowance drop-down list. The amount you incorrectly claimed is added to your employer liability.

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