Have you claimed your employment allowance?

Payroll costs are likely to be one of your biggest outgoings. Finding more ways to reduce this 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 are eligible, this is a cash flow opportunity you should not ignore.

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.

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

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:

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.

Claim using HMRC’s Basic PAYE Tools – if you don’t use one of the payroll-software 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.

How do you make a claim for Employment Allowance 2022/23 through your payroll software?

The method for making an Employment Allowance claim will vary depending on the software you use to run your organisation’s payroll. You can either use an HMRC-recognised payroll software, or you can use HMRC’s free Basic PAYE Tools. We’ll start by looking at making a claim using your own choice of compatible payroll software:

Put ‘Yes’ in the ‘Employment Allowance indicator’ field
Do this next time you send an Employment Payment Summary (EPS) to HMRC. This tells HMRC that your organisation is ready to claim the allowance against any employers’ Class 1 NI contributions included in your next payroll run.

Select your business sector under ‘de minimis state aid rules’
This tells HMRC what industry or sector your organisation trades in. Your payroll software will apply the relevant de minimis state aid threshold for payments you receive. Once you exceed the state aid threshold for the current three-year period, you will no longer be eligible for Employment Allowance.

Select all business sectors that apply to your organisation
There are specific business sectors for agriculture, fisheries and transport. But most organisations will choose ‘Industrial/Other’ as their business sector. This gives you a de minimis state aid threshold of €200,000 for the period.

Select ‘State aid rules do not apply’ if relevant
If your organisation is a charity or amateur sports club, or if you employ a care worker, you won’t make or sell goods and services. If this reflects your trading status, you can tick the ‘State aid rules do not apply’ box to bypass the state aid threshold.

How do you claim Employment Allowance 2022/23 using HMRC’s Basic PAYE Tools?

If you’re not using one of the compatible payroll software packages on HMRC’s list, you can download the free Basic PAYE Tools software from the HMRC website.

The Basic PAYE Tools package is available for Windows, Mac and Linux platforms. Once downloaded, it gives your organisation a simple way to run payroll, share NI information and submit EPS or Earlier Year Update (EYU) to HMRC.

To make a claim for Employment Allowance through the Basic PAYE Tools software:

  • Select the correct name in the ‘Employer’ menu on the home page
  • Select ‘Change employer details’.
  • Select ‘Yes’ in the ‘Employment Allowance indicator’ field.
  • If you sell goods or services, answer ‘Yes’ to the ‘Do state aid rules apply?’ question and then select the business sectors that apply to you. Otherwise, answer ‘No’ and select ‘State aid rules do not apply’.
  • Send your EPS as normal.

It’s a relatively straightforward way to make a claim. HMRC will apply the allowance until your claim reaches the relevant threshold for Employment Allowance or state aid.

Can you claim for previous tax years?

A successful claim for Employment Allowance in the 2022/23 tax year will help you reduce your payroll costs. And, importantly, eligible organisations can make retrospective claims for previous tax years too. That’s a potential saving of up to £19,000!

Retrospective claims can go back four years. So, if you’ve never claimed Employment Allowance before, there’s an opportunity to claim against your employer Class 1 NICs going back as far as the 2018/19 tax year.

In total, this means you may be eligible to claim:

  • £3,000 for the 2018/2019 tax year
  • £3,000 for the 2019/2020 tax year
  • £4,000 for the 2020/2021 tax year
  • £4,000 for the 2021/2022 tax year
  • £5,000 for the 2022/2023 tax year

If you make a successful claim for all years, that potential £19,000 frees up cash that you can reinvest back into the growth of your organisation.

During the 2018/19 and 2019/20 tax years, there was no limit on the employers’ Class 1 National Insurance liability, or how much de minimis state aid you could receive. If you make an Employment Allowance claim for 2018/19 or 2019/20, the thresholds for employers’ Class 1 National Insurance and de minimis state aid do not apply.

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 are an employer and meet the criteria, Employee Allowance is a valuable opportunity you should not ignore.

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