The £4,000 UK Employment Allowance Explained

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The Employment Allowance can benefit some businesses in the UK that have employees. It can lessen their annual National Insurance (NI) payment by up to £4,000. For the 2020/21 tax year, new rules were implemented on the types of businesses that are qualified in claiming this reduction.

Eligibility for Employment Allowance Starting on April 6, 2020

Beginning on April 6, 2020, the Employment Allowance can only be enjoyed by smaller businesses only. Unfortunately, businesses that have an Employer NI bill of £100,000 or more during the previous tax year will not be qualified in claiming the allowance. The Employment Allowance for the 2020/21 tax year has increased to £4,000 from £3,000 in the 2019/20 tax year.

If you want to know everything about these modifications on Employment Allowance then you can visit the gov.uk website.

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For the 2020/21 tax year, a reduction of up to £4,000 from Class 1 National Insurance Contributions (NICs) can be claimed by qualified businesses. Also, the amount of £8,788 for the Class 1 National Insurance secondary threshold cannot be claimed by a company that only has one employee in case that employee is also the director of the company.

Unfortunately, a lot of freelancers and contractors won’t be able to use the allowance since they do not pay Class 1 National Insurance Contributions (NICs), usually, they pay Class 2 and Class 4 National Insurance Contributions (NICs). Additionally, you won’t be able to claim the Employment Allowance if you perform more than 50% of your work in or for the public sector. Also, if you hire someone personally to do some domestic work for you, for instance, a gardener or a nanny.

Although, there are some exemptions to the public sector laws. For instance, you might still be eligible if you provide IT services for a government or local council. Or if you provide public building such as government or council offices with security or cleaning services.

If you want to know more about this new eligibility rules for employment allowance then you can always go to the gov.uk website.

What Are The Rules?

The Employment Allowance is not the same with any other HMRC giveaways, which are considered as one-time exemptions. This is simply a £4,000 limit which can be used by qualified businesses every tax year.

Typically, Employer National Insurance Contributions (NICs) are charged at 13.8%. However, for a full-time employee who has earnings of £22,000, they will have to pay £151.94 monthly or £1,823.26 yearly for their Employer National Insurance Contributions (NICs). You can refer to the gov.uk website for a listing of the different Employer NIC rates.

For instance, if a company has one employee that is being paid at £22,000 and wants to claim the Employment Allowance, then he won’t have to pay anything for his Employer NICs for the tax year since £1,823.26 falls within the range of the £4,000 allowance.

What if another employee is earning £43,000 per year and incurs £4,721.26 for his Employer NICs per year? After claiming the Employment Allowance of £4,000, his remaining payable for the tax year would be £721.26.

Also, take note that Employer NICs that are more than £4,000 should only be paid after the Employer Allowance has been consumed. So, with regards to the example above, there won’t be any payment for the first ten months of the Employer NICs for the given tax year. However, in the eleventh month, he must pay £327.84, then £393.42 for the twelfth month, so the overall total would be £721.26.

Also, the Employment Allowance of £4,000 can only be applied for each business, and not for every employee.

How Can The Company Claim The Allowance?

If your business is eligible for the Employment Allowance, then your payroll software will automatically deduct it from your Employer NICs.

Why Can’t The Self-Employed Avail The Allowance?

Since the self-employed, such as the freelancers and contractors, pay Class 2 and Class 4 NICs then they are not qualified for the Employment Allowance. Unfortunately, this is another government policy that neglected the self-employed.

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