Employment Allowance for small businesses

Small businesses and charities could claim up to £5,000 towards their National Insurance bills, under the Employment Allowance scheme. That’s extra cash in the pockets of businesses and charities that need it most.

What is an Employment Allowance?

Employment Allowance is a scheme that helps small businesses and charities with their National Insurance bills. For a small business or charity with limited cash flow, Employment Allowance can alleviate the financial strain of a hefty bill.

If your Class 1 Secondary National Insurance contributions were below £100,000 in the previous tax year, you could claim up to £5,000 Employment Allowance. HMRC have other criteria you need to meet, and we’ll explore those further in this guide.

Note: Employment Allowance isn’t the same as employment relief. Small Employers’ Relief allows qualifying businesses to claim back 100% plus an additional 3% of employee statutory payments.

Benefits of Employment Allowance

Small businesses and charities get a helping hand with their National Insurance bill when they claim Employment Allowance - with up to £5,000 in support. For the smallest employers, that could mean their National Insurance contributions are completely taken care of by the allowance.

You can start using the Employment Allowance as soon as you’ve made your claim – you don’t need to wait for a confirmation email. If your claim is rejected, HMRC will send you an automated message within five working days.

If you’re using Xero, navigate to ‘Payroll Settings’ and click on the ‘HMRC’ tab. Then, under ‘Will you be claiming Employment Allowance for the following tax years?’, select the relevant tax year.

You can also claim Employment Allowance for the previous four tax years using HMRC’s basic PAYE tools.

Employment Allowance and HMRC

You can view and manage your Employment Allowance in your HMRC online account.

You can use your payroll software to claim this Employment Allowance. HMRC’s basic PAYE tools are also an option if you haven’t got payroll software in place yet.

Employment Allowance for the year 2023/24

Small businesses and charities can claim up to £5,000 in Employment Allowance (2023/24 tax year). This is the same maximum allowance as the 2022/23 tax year.

Employment Allowance can be claimed at any time during the tax year, using payroll software or HMRC’s basic PAYE tools. But the sooner you submit the claim, the earlier you’ll receive your allowance.

Read the HMRC guidance to see how Employment Allowance 2023/24 differs from previous years.

Eligibility for Employment Allowance

Most small businesses and charities are eligible for Employment Allowance if their National Insurance liabilities for the previous tax year are below £100,000.

But other criteria affect your eligibility for Employment Allowance. For example, if you’re operating a charity that’s part of a group, the total National Insurance liabilities must be below £100,000. Employment allowance can only be claimed for one of the payrolls in the group, too.

If you make payments to off-payroll workers (such as contractors), any Class 1 National Insurance liabilities for those workers do not count towards the £100,000 threshold.

If you’re using Xero Payroll we’ve got this covered and will exclude off-payroll workers from the amount claimed.

You also need to know if the de minimis state aid (financial help from the government) threshold applies to your business. If your business is based in Northern Ireland and makes or sells goods or wholesale electricity, de minimis state aid rules will likely apply to you.

There’s a limit to how much de minimis state aid you can claim over three years, and there are different thresholds for different sectors. You can find out more about these thresholds and eligibility for Employment Allowance on the HMRC website.

How to claim Employment Allowance

You can make an Employment Allowance claim through your payroll software or HMRC’s basic PAYE tools by following these steps:

1. Check your eligibility

Firstly, make sure your business or charity meets the eligibility criteria. You’ll need at least one employee who isn’t a company director and who is paid above the Class 1 National Insurance secondary threshold. Use the previous section of this guide and the HMRC guidance to check your eligibility.

2. Verify you're not excluded

Some businesses are excluded from claiming Employment Allowance, such as:

• Public bodies or businesses doing more than half of their work in the public sector
• Companies with only one employee who is paid above the Class 1 National Insurance secondary threshold AND who is also a company director

There are certain other people you can’t include in your claim. For instance, someone you hire for personal, household, or domestic work (except for care or support workers). And those working within IR35 rules (off-payroll workers) cannot be included in your claim either.

3. Confirm your software compatibility

Make sure your payroll software has Employment Allowance claim functionality. Most payroll software providers have updated their systems to accommodate the process.

Xero features let you claim Employment Allowance and report your industry to HMRC each tax year. Here’s a step-by-step guide to claiming Employment Allowance with Xero.

4. Submit your claim with Xero

If you use Xero payroll software, you need to activate Employment Allowance via the following steps:

1. Navigate to ‘Payroll’, and click ‘Payroll Settings’
2. Select the ‘HMRC’ tab
3. Select the applicable tax year under ‘Will you be claiming Employment Allowance for the following tax years?’
4. When asked to select industry type, pick the industry your business is in. If your industry isn’t listed or doesn’t apply, select ‘other’ or ‘state aid rules do not apply to this business’. You can change the industry if you select the wrong one at a later date.
5. Click ‘Done’ and then ‘Save’

5. Keep payroll records

If your claim is successful, you can start using your Employment Allowance immediately. Your Class 1 National Insurance contributions will be reduced until you reach the claimed amount or the tax year ends (whichever comes first).

You’ll need to keep records of how much Employment Allowance is used during the tax year. Payroll software should take care of this through your payment summary report. Find out more about the records you need to keep for Employment Allowance on the HMRC website.

6. Seek professional advice if needed

For small business support and Employment Allowance advice, it’s best to speak with an accountant or bookkeeper. Once your claim has been approved, accessing Employment Allowance couldn’t be more simple with the right payroll software.