The Employment Allowance reduces the amount of National Insurance employers have to pay by up to £5,000 per year. So, can your limited company benefit from this incentive in 2023/4?
Employment Allowance – The Basics
The scheme was implemented to help stimulate economic growth and encourage small firms to take on more employees.
It is open to all businesses with a total NI bill of £100,000 or less during the previous tax year.
By using the scheme, a company can write off the first £5,000 (from April 2022) of its overall Employers’ NIC bill each year.
The allowance was increased from £4,000 following an announcement in the March 2022 Spring Statement.
The Allowance itself is ‘claimed’ each month via your firm’s payroll process, as the liability arises.
So, no Employers’ NICs are payable until your company’s entire £5,000 allowance has been used up.
Employment Allowance eligibility for limited companies
- You can only claim the Allowance if you pay Class 1 Employers’ National Insurance Contributions – as limited companies do.
- The self-employed are ineligible to claim against any profits they draw down personally, as they pay Class 2 and Class 4 Contributions. However, they can claim if they have employees and make Class 1 NICs.
- You cannot claim if you provide services to a public sector body.
- If you are caught by IR35, the Allowance cannot be claimed against deemed salary payments.
- Sole director companies without additional employees cannot claim the Allowance. The whole point of the EA is to encourage firms to take on extra staff! So, if you’re a one-man-band, without employees, your company cannot claim the EA. This rules out a large proportion of professional contractors’ companies.
- If your company does have one or more employees, at least one other person in addition to the director must be paid above the secondary NIC threshold of £9,100 per year (2023/24) to qualify.
- See Section 14 of this Government EA guide which provides examples of when the EA can be claimed by small companies. For example, if you and your spouse are both directors and both earn above the secondary Class 1 NIC threshold, you can claim the EA.
Things to consider when setting salary levels
Your company will only benefit from this Government measure if it pays salaries to directors and employees which incur employers’ National Insurance.
As salary levels increase, income tax and Employees’ NIC liabilities also rise, so there are several things to bear in mind when setting the ideal salary level.
- The Personal Allowance (the amount you can earn before paying any income tax at all) is £12,570 in 2023/4.
- You don’t pay any Employees’ NICs at all if your salary is beneath the Primary Threshold.
- Your company pays Employers’ National Insurance at 13.8% on salaries above the Secondary Threshold of £9,100 per year.
Find out what the most tax-efficient director’s salary is for 23/24 here.
Employment Allowance 23/24 – £12,570 salary
If your company is eligible to claim the EA, is it worth paying the director(s) a £12,570 salary during the 2023/4 tax year, compared to £9,100?
|Tax||£9,100 Salary||£12,570 Salary|
|Employers’ NICs||Nil||Nil (£478.86 refunded by EA)|
|Corporation Tax saved||£1,729||£2,388.30|
|Corporation Tax difference||Nil||£659.30|
|Net Saving to Company||Nil||£659.30|
|Employees’ NICs (paid by director)||Nil||Nil|
- If the company pays its director(s) / employees(s) a £12,570 salary, its £478.86 Employers’ NI bill per employee is offset thanks to the EA.
- No Income Tax is payable on either salary in the table above, as the Personal Allowance for 2023/24 is £12,570.
- By paying a salary of £3,470 more than the £9,100 salary level, the company also saves £659.30 in Corporation Tax per employee. This represents a significant saving if your company is eligible to claim.
- The employee has no employees’ NICs to pay.
- In these examples, we assume that your total personal income is less than £100,000, as the £12,570 personal allowance is eroded by £1 for every £2 you earn above £100,000.
- From 2020/21 onwards, the EA has to be claimed every year in order to receive it, and relief can no longer be carried over between tax years, as it has been in previous tax years.
- Although we have taken care in producing this article with help from our own accountants, please ask your accountant if you have any questions about your salary level, and how your company could benefit from the Employment Allowance.
- For more information, visit GOV.UK.