Accounting Tips, Business

Employment Allowance: everything you need to know

13 December 2022   |   8 minutes read
Employment Allowance

Payroll costs are likely to be one of your organisation’s biggest outgoings. Finding new ways to reduce this labour expenditure makes good financial sense – especially in the current economic climate. Employment Allowance 2022/23 is one of HMRC’s tax relief schemes that could offer your business, charity or amateur sports club a helping hand.

Up to £5,000 in Employment Allowance is available for the current tax year, and claims for previous tax years are allowed. If you’re eligible, this is a cash flow opportunity you shouldn’t ignore.

Our breakdown of Employment Allowance asks:

What is Employment Allowance 2022/23?

Employment Allowance 2022/23 is a government initiative that helps your organisation reduce its employers’ Class 1 National Insurance (NI) contributions.

If you’re eligible, and make a successful claim to HM Revenue & Customs (HMRC), you’ll reduce your employers’ Nl by up to £5,000 for the 2022/23 tax year. The allowance is easy to set up and is applied automatically through your payroll software.

With Employment Allowance applied:

  • You won’t pay any employers’ Class 1 NI contributions for the life of the allowance
  • You’ll automatically cut your payroll costs and free up cash
  • Once you reach the £5,000 upper limit, you’ll return to paying NI contributions as usual.

There’s a more detailed overview of Employment Allowance 2022/23 here.

Who is eligible for the allowance?

To be eligible for Employment Allowance you must be an employer and meet the threshold for your Class 1 NI contributions. Organisations that can claim the allowance include businesses, charities (including amateur sports clubs) and private employers of care or support workers.

To meet the eligibility criteria:

  • Your employers’ Class 1 National Insurance liabilities for the previous tax year must be less than £100,000
  • You must meet the de minimis state aid rules for your industry sector
  • You must only claim for one payroll, and one company, within your group structure
  • You must not claim for contractors who are paid ‘off payroll’ and fall within the IR35 rules

We’ve got more details on the eligibility criteria here.

How do you claim Employment Allowance 2022/23?

Thankfully, making a claim for Employment Allowance 2022/23 is a relatively straightforward process for eligible organisations. There are two main routes for claiming the allowance and cutting your Class 1 NI contributions.

The two options are:

  1. Claim through your payroll software – HMRC has a list of compatible payroll software that will allow you to claim the allowance. Ticking the relevant boxes in your software settings will automatically apply the allowance each time you submit a payroll return.
  2. Claim using HMRC’s Basic PAYE Tools – if you don’t use one of the payroll softwares on HMRC’s list, you can download the free Basic PAYE Tools. This Mac, Windows and Linux-compatible software lets you run a simple payroll. It also lets you claim for Employment Allowance each time your payroll is submitted to HMRC.

Follow our step-by-step instructions for making an Employment Allowance claim here.

Maximise this opportunity to cut your payroll costs

One of the main benefits of Employment Allowance is that claims for previous tax years are allowed. These retrospective claims can go back as far as the 2018/19 tax year, and will be calculated at the historic rate for that period.

Depending on your situation, you may be able to claim £3,000 for each of the 2018/19 and 2019/20 tax years. If you’re eligible, you can claim up to £4,000 for both 2020/21 and 2021/22. And that’s all in addition to the £5,000 threshold for the current tax year 2022/23.

Claiming for this tax year and the four previous years frees up a potential £19,000 in employers NI contributions. That’s money you can use to boost your cash flow, helping you reinvest in growth, expand your team or buy new assets.

If you’re an employer and meet the criteria, Employee Allowance is an opportunity you shouldn’t pass up.

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