Employment allowance

In 2014, the government introduced employment allowance, giving most companies the chance to reduce their employer class 1 national insurance (NI) contributions. On 6 April 2016, the employment allowance increased to £3,000. Businesses with a sole employee who is also a director are not eligible for employment allowance. Most other businesses can claim it.

The employment allowance remains at £4,000 in the 2020/2021 tax year. If you’re unsure whether or not you’re eligible for employment allowance, you must speak to HMRC.

Payroll handles the allowance claim automatically, all you need to do is specify whether you qualify when you record your payment to HMRC. The amount you can claim is then offset against your Employers Class 1 NIC Liability to HMRC. From the 2020/2021 tax year, you need to claim employment allowance each tax year.

The employment allowance is applied in full to the contributions each month or quarter, until it is exhausted.

Who qualifies?

From the 2020/2021 tax year, changes effectively withdraw employment allowance for medium and large sized companies, with approximately 100,000 employers affected by the change. However over 99% of micro-businesses and 93% of small businesses will still be eligible for the allowance.

More information about employment allowance changes is available from the government website.

Claim employment allowance for the current tax year

You must process all pay runs and submit your full payment submission (FPS) for your first P32 reporting period before you can claim employment allowance.

To apply for Employment Allowance for the new tax year:

  1. From the Summary tab, click Record Claim.

  2. Enter the details of your employment allowance claim:

    Note:

    You must choose an industry sector before submitting your claim. If you are not sure what sector applies to your business, contact HMRC.

    Industry Sector*

    Agriculture

    Fisheries and Aquaculture

    Road Transport

    Industrial

    State Aid Rules Do Not Apply

    Select the industry sector that applies to your business.

    If none of the named sectors applies to you, either select:

    Industrial - if the state aid rules apply to your business

    or

    State Aid Rules Do Not Apply - If your business does not fall under state aid rules.

    State Aid Claimed € 0.00

    For the 2020/2021 tax year, you do not need to enter this value. HMRC will check this for you.

    The value is listed in Euros because the thresholds are set by the European Commission.

  3. Click Next.
  4. Confirm the details you're submitting to HMRC then click Submit.

You can view the status of your claim from the Summary tab:

HMRC then have 5 working days to send you a letter or email confirming whether your application has been approved.

Update the EPS for each completed reporting period

  1. From the Summary tab, click Record Payment / EPS.
  2. Change the Eligible for small employer's relief drop-down menu as required.
  3. Complete the P32 payment as normal.

The option you selected in the Eligible for small employer's relief drop-down is automatically selected for the remaining payments you submit in the current tax year.

How to revert an Employment Allowance claim

If you need to revert a previous claim for Employment Allowance and have submitted an EAC via the new feature:

  1. From the Summary tab, click Record Payment / EPS.
  2. Change the Eligible for small employer's relief drop-down menu to No.
  3. Complete the P32 payment as normal.

This change in status is then transmitted to HMRC and the summary page in Accounting is updated to show that you are not eligible.


You’ve successfully claimed employment allowance. Each month your liability to HMRC automatically reduces, until you claim the full allowance.

You can view and keep track of your employment allowance from within the Pay Runs tab:

  • Click the relevant pay run, then click P32 Employer Payment Record.

This report shows how your liability is offset by the employment allowance. You can also see how much you have left to claim from the amount carried forward.

Please note that if you claim Employment Allowance part way through the tax year, this may cause your PAYE liability to be reduced on top of employer’s NI. This usually happens if you are too far into the tax year to claim the full £3000 relief on employer’s NI alone.

To claim employment allowance for previous tax years

For advice about this, please contact HMRC. They’ll be able to use any unclaimed allowance against any outstanding payments or offer you a refund.

You cannot use Payroll to reclaim previous tax year allowances.

If you claim employment allowance in error

If you claim employment allowance in error, some of your employer NI contributions may be offset by the allowance when they shouldn’t be. If this happens, you must repay the allowance you claimed by mistake.

If you have any queries on whether to repay the allowance or not, you should contact HMRC on 0300 200 3500.

To repay the allowance when you submit your next EPS, you should choose No from the Eligible for NI Employment Allowance drop-down list. The amount you incorrectly claimed is added to your employer liability.