Employment Allowance for start-ups explained

For start-ups across the UK, the government’s Employment Allowance can be a good way to save money as your business grows.

You can claim up to £5,000 off your start-up’s National Insurance contributions each year, helping to free up cash and reduce your financial obligations as you hire new staff.

It can make a huge difference for start-ups that are concerned about the extra costs of hiring new employees.

Beyond wages and extra equipment, you must budget for and pay National Insurance contributions for employees – but you could cut this bill significantly with the Employment Allowance.

Find out if your business is eligible to receive Employment Allowance and discover how you can make a claim.

What is Employment Allowance?

Employment Allowance is a government initiative that helps businesses reduce their Class 1 National Insurance liability.

National Insurance contributions are payments made to HM Revenue & Customs (HMRC) as a form of tax, with employees and employers each making contributions.

The initiative applies to the employer’s liability (the employee’s contribution is unaffected and is typically deducted from their salary automatically).

Start-ups eligible to receive Employment Allowance can reduce their liability by a set annual threshold.

For the 2023/2024 tax year, the allowance is £5,000.

How does Employment Allowance work?

Employment Allowance enables start-ups to claim money off their Class 1 National Insurance liability.

This sum applies to a business’s total contributions rather than a per-employee allowance.

For example, if you have two employees who each incur a National Insurance contribution of £250 a month (or £3,000 a year), your total liability for the year will be £6,000.

You can claim the first £5,000 as part of the Employment Allowance and only pay the remaining £1,000.

If your liability for the year is less than £5,000, you will not have to pay anything.

Learn more about your business’s tax requirements.

Is your start-up eligible for Employment Allowance?

You might be eligible for Employment Allowance if:

• you run a business or charity
• your total Class 1 National Insurance liability was less than £100,000 in the previous tax year
• you have one paid employee who is not a director and who earns above the Class 1 National Insurance Secondary Threshold
   

You might also be eligible if you are a limited company whose employees are all directors, but at least two of them earn more than the Class 1 National Insurance Secondary Threshold.

Certain employees cannot be included in your claim for Employment Allowance, such as:

• staff who are classed as an ‘employment intermediary’ and whose earnings are within IR35 ‘off-payroll working rules’
• individuals who you employ for personal, household, or domestic work – unless they are a care or support worker
• freelancers and contractors.

You are also not eligible if you’re a public body or do more than half of your work in the public sector (although there are exceptions for charities).

There are further exceptions for public sector businesses, such as those that provide IT services for a government or local authority, as well as businesses that provide security or cleaning services for a public building.

Start-ups in Northern Ireland should also check whether Employment Allowance counts as ‘de minimis state aid’.

This regulation applies across the EU (and Northern Ireland due to post-Brexit trade agreements) and limits the amount of government support your start-up can receive over a three-year period.

How do I claim Employment Allowance?

As soon as you confirm your eligibility, you can automatically claim Employment Allowance.

If you use payroll software, you can enter ‘Yes’ in the Employment Allowance indicator field the next time you submit your Employment Payment Summary to HMRC.

You can also claim Employment Allowance using Basic PAYE Tools by following the HMRC’s guidance:

• select your employer on the home page
• select ‘Change employer details’
• select ‘Yes’ in the ‘Employment Allowance indicator’ field
• answer whether de minimis state aid rules apply, and if so, you should select the relevant business sectors
• submit your Employer Payment Summary.
   

It could be helpful to make this claim at the start of the tax year to make the most of your allowance, but you can do so at any point by using the HMRC’s Real Time Information measures.

Once your claim has been submitted, you start accruing your allowance immediately.

Read about other expenses that your business can claim.

Can I claim for past years?

You can backdate your Employment Allowance for the previous four tax years.

You will need separate Employment Payment Summaries for each year to make a claim.

Once those forms have been submitted, HMRC will offset your backdated allowances against any future National Insurance liabilities or refund the amount.

You must keep any records related to Employment Allowance claims for at least three years after the tax year you have claimed for, and these documents should demonstrate why you were entitled to the claim, how much allowance was used, and what liabilities you have claimed for.

Discover more ways to minimise your tax liability.

How to stop claiming Employment Allowance

You can stop your Employment Allowance claim by selecting ‘No’ in the Employment Allowance indicator field when you next submit an Employment Payment Summary.

You only need to do this if your business circumstances change and you no longer meet the eligibility requirements – such as if you no longer have an employee who earns above the Class 1 National Insurance Secondary Threshold or your Class 1 National Insurance liability in the previous year exceeded £100,000.

You don’t need to stop your claim if you have reached the £5,000 annual threshold or if you no longer have any eligible employees – you can still claim the allowance for the rest of the tax year.

If you end your claim, any allowance you’ve been given will be removed, and you will have to pay any Class 1 National Insurance liability.

Other government allowances for small businesses

Employment Allowance is just one of several government initiatives that can help you save money.

You might also be eligible for:

• Mileage allowance – covers travel costs in your personal vehicle
• HMRC’s 24-month rule – allows contractors to claim travel and accommodation costs when they work at a temporary workplace
• R&D tax credits – helps businesses reclaim the money spent on research and development.

By taking advantage of these schemes, you can cut costs and generate extra cash to support your business’s growth.