If it is eligible, your company may be able to reclaim up to £5,000 (from April 2022) of Employers’ National Insurance Contributions (NICs) from HMRC each year, thanks to the Employment Allowance.
Here we describe how the tax measure works, and if contractor companies can benefit from it.
Why was the Employment Allowance implemented?
This Government incentive was put in place in April 2014 to encourage business growth by cutting the cost of employing people.
Once an employer has made an initial claim, it can continue to do so into the future without having to make an annual claim each time.
According to the Office for Budget Responsibility, the measure costs the Treasury up to £700m per year to operate.
How does the Allowance work in practice?
If you employ any staff (including directors), your company must pay Class 1 Employers’ NICs on salaries above the prevailing secondary threshold, which is currently £9,100 per year (2023/24).
The employers’ NIC rate is 13.8% for the 2023/4 tax year.
If your business is eligible (see below), any Employers’ NICs you would normally be liable to pay are reduced by up to £5,000. You only start paying NICs again if your total liability for the year-to-date is greater than this amount.
You can only offset your NIC liability against the EA if you have actually incurred costs. In other words, it will only benefit your business if you have employees who earn salaries above the secondary threshold.
Is your company eligible to claim it?
Two years after it was first implemented, new rules placed restrictions on the type of businesses which can take advantage of the Employment Allowance.
- If you’re running a limited company, where the director is also the sole employee (as is often the case with contractor companies), you cannot claim the Allowance.
- If a small company has several employees, and the director is the only employee with a salary above the secondary NIC threshold, then the company cannot make a claim either.
- You cannot claim the EA if your contract work is caught by the IR35 legislation.
- You cannot claim if at least 50% of your work is done in, or with, the public sector.
- If you’re self-employed, you can claim if you hire employees and their salaries are subject to Class 1 NICs.
More restrictions exist for various types of non-contractor businesses. See this helpsheet for more details.
How to make a claim
Many contractors will not be able to take advantage of this incentive, as they are often sole directors of their businesses. If this is not the case, and your business incurs Employers’ NICs, your accountant will be able to determine whether or not your company is eligible, and set up your initial EA claim.
Practically speaking, when you make a claim via your payroll software (which is typically also set up by your accountant), you tick ‘Yes’ in the Employment Allowance indicator the next time you submit an Employment Payment Summary (EPS) to HMRC. You can make this claim at any time during the tax year.