Employment Allowance for start up businesses explained

By:

Date: 20 October 2020

A business owner at work with employees working in the background

Since 2014, all eligible employers within the UK have been able to reduce Class 1 NIC's by claiming the Employment Allowance for their company. The Employment Allowance is claimed as part of a company's HMRC payroll submissions. If claimed, employers are not required to pay the first £4,000 of employer's national insurance – a great opportunity for significant financial savings that could benefit most up and coming start up businesses!

Are start up businesses eligible for the employment allowance?

Here's the good news; if you have never claimed Employment Allowance for your start up before, you can retrospectively apply for the past four tax years – dating back to the 2016/17 tax year!

The Employment Allowance was £3,000 per year in previous years so your start up business may be entitled to as much as a £12,000 refund from HMRC (coupled with this year's tax relief). Most start ups businesses in the UK should be eligible for Employment Allowance, but there are some exemptions which you need to be aware about before applying.

Which start up businessed are exempt from Employment Allowance?

1. Class 1 liability over £100,000

Start up business owners who have a secondary employer's Class 1 NIC liability of £100,000 or more during the prior tax year will not able to claim Employment Allowance. It is recommended that liability be calculated by considering all connected parties. Should the NICs of the connected employers add up to over £100,000, then none of the employers within the connected group would be eligible for Employment Allowance.

2. State aid

From 6 April 2020, Employment Allowance is operated as “de minimis State aid”. In other words, employers who already claim de minimis state aid will be required to check whether or not they have sufficient balance available to make an Employment Allowance claim. Should you already be receiving de minimis state aid, this will be something you would have already been made aware of. If you believe that you already claim de minimis state aid but were not notified, this needs to be raised with your scheme's administrator.

Additionally, any UK start up business that receives more than their particular sector's ceiling or who would breach their business ceiling by claiming Employment Allowance would not be granted eligibility. The ceiling for most start up businesses is currently valued at EUR 200,000. If you are not sure of what your industry's ceiling is, then this should be verified using the HMRC website.

3. Single company directors

If a start up business has just one employee paid over the Secondary Threshold for Class 1 National Insurance contributions who also happens to be the company director, eligibility for Employment Allowance would also be refused here. Furthermore, any start up business that consists of a single employee would also not meet the threshold for claiming Employment Allowance.

How to claim Employment Allowance

The best way to apply employment allowance for your business is to entrust this task to a professional accountancy firm who specialises in providing personalised accountancy services for start ups and small businesses.

Copyright 2020. Article was made possible by site supporter Venn Accounts, chartered accountants based in central London specialising in personalised accountancy services for start ups and small businesses.

What does the * mean?

If a link has a * this means it is an affiliate link. To find out more, see our FAQs.