If you’re the sole director of a company without any employees, you cannot claim Employment Allowance on your director’s salary. However, you may be eligible to claim if the company pays at least one employee (who is not a director) or at least two directors above the qualifying National Insurance threshold.
We explore the topic of Employment Allowance in more detail, including what it is and what you’re entitled to. We will also look at eligibility criteria for companies, and how to claim Employment Allowance through your payroll.
What is Employment Allowance?
Employment Allowance was introduced in the National Insurance Contributions Act 2014 as a way to help and encourage small businesses to take on more employees.
The scheme enables eligible firms to reduce the amount of employers’ Class 1 National Insurance contributions (NICs) they pay each month through payroll on their employees’ wages. However, the allowance cannot be used against Class 1A or Class 1B NIC liabilities.
For the 2023-24 tax year, the annual Employment Allowance is £5,000. This means that eligible employers won’t pay any employers’ Class 1 NICs until the £5,000 allowance has been used up. Essentially, this could save your company £5,000 in the 2023-24 tax year.
To be eligible to claim Employment Allowance through your limited company, you must satisfy the following conditions:
- operate as a business or charity (this includes community amateur sports clubs)
- be registered as an employer with HMRC
- have at least one employee (who is not a director) or at least two directors paid above the Class 1 NIC secondary threshold (£175/week, £758/month, £9,100/per year)
- had less than £100,000 employers’ Class 1 NIC liabilities in the previous tax year
- be within the de minimis state aid threshold for your trade sector (if you make or sell goods or services)
If your company is part of a group, the total Class 1 NICs for the group must be less than £100,000 – and only one company in the group may claim the allowance.
If you have or had more than one payroll, the total employers’ Class 1 NICs for the combined payrolls must be less than £100,000 – and you can only claim Employment Allowance against one payroll.
Who cannot claim Employment Allowance
You cannot claim Employment Allowance through your company if:
- only one employee is paid above the Class 1 National Insurance secondary threshold and the employee is also a director of the company
- more than half of your work is in the public sector (e.g. local councils, NHS services), unless your company is registered as a charity
So, as you can see, you won’t be able to claim Employment Allowance against your director’s salary if you are the sole director/employee of the company and/or you do not have any other employees or directors earning above the Class 1 NIC threshold.
Additionally, payments to certain workers cannot be included in your Employment Allowance claim, including:
- any person whose earnings are within IR35 ‘off-payroll working rules’ (e.g. contractors)
- any person you employ for personal, household, or domestic work (e.g. nanny, cleaner, gardener) unless they are a care or support worker
However, if your company’s circumstances change part-way through the tax year and you then become eligible for Employment Allowance, your company may be able to claim the allowance for the entire year.
GOV.UK’s Employment Allowance guidance provides detailed information on eligibility criteria, including a number of useful examples of when the allowance can and cannot be claimed through a single-director company.
How to claim Employment Allowance
You can claim Employment Allowance through payroll at any point during the tax year, when you send an Employment Payment Summary (EPS) to HMRC.
You will pay less employer’s NICs every month until the £5,000 allowance has been used up or the tax year comes to an end (whichever happens first).
The way in which you claim will depend on whether you use HMRC’s Basic PAYE Tools or your own payroll software.
1. Claiming through HMRC’s Basic PAYE Tools
- Select the correct name in the ‘Employer’ menu on the home page
- Select ‘Change employer details’
- Check ‘Yes’ in the ‘Employment Allowance indicator’ field
- If you sell goods or services, answer ‘Yes’ when asked ‘Do state aid rules apply?’, then select the business sectors that apply to your company
- If you do not sell goods or services, answer ‘No’, then select ‘State aid rules do not apply’
- Send your Employment Payment Summary to HMRC as normal
2. Claiming through your own payroll software
To claim through your own payroll software, select ’Yes’ in the ‘Employment Allowance indicator’ field when you send your next Employment Payment Summary to HMRC. If your software doesn’t have an EPS field, you can use HMRC’s Basic PAYE Tools instead.
If you make or sell goods, you will need to select the business sector that applies to your company under ‘de minimis state aid rules’ – even if you don’t make a profit. The ’Industrial/other’ category is the one that applies to most small companies.
If you don’t make or sell goods or services (e.g. you’re a charity, an amateur sports club, or you employ a care/support worker), select ‘State aid rules do not apply’.
When to claim Employment Allowance
Employment Allowance covers one tax year, so you will need to claim it every year that you’re eligible. You can claim the allowance at any time during the tax year; however, the earlier you claim it, the sooner you will get it.
If you are late making a claim and don’t use your allowance against your employers’ Class 1 NIC liabilities, you can ask HMRC to:
- use unclaimed Employment Allowance at the end of the tax year to pay any tax or NICs that you owe (including Corporation Tax and VAT if you don’t owe anything on your PAYE bill), or
- issue a refund after the end of the tax year if you don’t owe anything
Your HMRC online account will tell you how much Employment Allowance you have used each year that you’ve been registered as an employer.
Claiming for previous tax years
You can claim Employment Allowance for the past four tax years. This means that, currently, you can make claims dating back to the 2019-2020 tax year.
You will need to complete a separate Employment Payment Summary for each of the previous year’s claims. You have until 5 April 2024 to claim the allowance for the 2019-20 tax year, 5 April 2025 for 2020-21 tax year, and so on.
So there you have it…
We hope that this post has given you a better understanding of Employment Allowance and clarified whether or not you can claim it against your director’s salary.
If you have any questions about this topic – or anything else related to setting up and running a limited company – please leave a comment below.