Employment Allowance in National Insurance: A Guide for Small Businesses

Cover Image for Employment Allowance in National Insurance: A Guide for Small Businesses

| Courtney Price

The Employment Allowance in National Insurance is a significant financial benefit that small businesses in the UK can leverage. However, changes made in 2020 have altered the landscape of this allowance, making it essential for businesses to understand these modifications and how they impact their eligibility.

In National Insurance: A Refresher, Jo Marshall gave her insights into the different classes of national insurance as well as employment allowances.

Previously, claiming the Employment Allowance was a straightforward process. Businesses would simply tick a box within their employment payment summary (EPS) to claim their allowance, which could be up to £4,000. However, in 2020, the HMRC introduced restrictions on this allowance, limiting its availability to smaller businesses.

So, what defines a small business in this context? The HMRC has clarified that if an employer's National Insurance contribution in the previous tax year was less than £100,000, they are eligible to claim the Employment Allowance. However, if the contribution exceeded this amount, the business is no longer eligible to claim the allowance.

This change was implemented as part of an effort to target aid towards businesses that need it most. Larger businesses, which may not even realize they were claiming this money, are now excluded from this benefit. This shift has been seen as a form of state aid, as it provides financial assistance to some businesses but not others based on their size and income.

However, the changes didn't stop there. The Employment Allowance was increased to £5,000 last year, providing a significant boost for small businesses. For many small businesses with just a handful of employees, this increase could cover a substantial portion of the employer's National Insurance contributions for a good chunk of the tax year.

However, claiming the Employment Allowance has become more complex. Businesses now need to identify their sector and ensure that any state aid received over a rolling three-year period does not exceed £200,000. This additional layer of complexity means that businesses must be more diligent in their record-keeping and understanding of the rules.

Despite these changes, the Employment Allowance remains a valuable benefit for small businesses. It's crucial to keep an eye on any further modifications to the criteria, as there are ongoing discussions about potential changes within government departments.

Navigating the complexities of the Employment Allowance can be challenging, but it's worth the effort for the financial benefits it can bring to your business. If you're unsure about your eligibility or how to claim, consider seeking professional advice to ensure you're making the most of this opportunity.

The Employment Allowance in National Insurance is a significant financial aid for small businesses. Despite the changes and complexities introduced in recent years, it continues to provide substantial support to those who need it most. By staying informed and proactive, small businesses can leverage this allowance to its fullest potential.

To watch the full session, please click here. During this session, Jo Marshall covers the following topics:

  • The 13 NI Category Letters
  • The different classes of NI
  • The calculation of NI
  • Employment Allowance
  • The importance of the Lower Earnings Limit

The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.

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About the Author

Courtney Price is a content creator for CPDStore UK. Courtney joined us during the COVID-19 pandemic and has been involved in the ever-evolving world of accounting ever since. Her passion for reading and writing, coupled with her degree in copywriting from Vega School has allowed her to channel her creativity and expertise into crafting engaging and informative content.


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