The National Insurance Employment Allowance (EA) is a vital relief measure provided by the UK government that allows eligible employers to reduce the amount of National Insurance Contributions (NICs) they pay. This allowance is designed to encourage business growth and ease the burden of employer NICs, particularly for small businesses, charities, and community groups.
Introduced in 2014, the Employment Allowance has seen several adjustments over the years, with the most recent update announced in the 2024 budget. As of 30 October 2024, the Employment Allowance increased significantly from £5,000 to £10,500. This article will break down how this increase impacts employers, alongside the simultaneous rise in employer NIC rates and reduction in the threshold from which employer NICs must be paid.
Key Updates in the 2024 Budget
Employment Allowance Increase:
From 6 April 2025, the Employment Allowance will rise to £10,500. This means eligible employers can reduce their NICs liability by up to £10,500 annually. For many small businesses, this could cover their entire NICs bill, potentially saving thousands of pounds.
Increase in Employer NIC Rate:
The employer NIC rate has increased from 13.8% to 15%. This increase means that businesses will now have to contribute a higher percentage of their payroll costs towards NICs for each employee, affecting overall payroll costs.
Reduction in NIC Threshold:
The threshold for paying employer NICs has been reduced from £9,100 per year to £5,000 per year. This change lowers the earnings point at which employers start paying NICs, meaning more of an employee's salary is subject to NICs from the employer’s side.
Who is Eligible for the Employment Allowance?
The Employment Allowance is aimed at helping small employers in the UK. To qualify for this allowance, businesses must meet specific criteria, including:
Having an employer NIC bill below £100,000 in the previous tax year.
Not employing individuals for personal, household, or domestic work (e.g., cleaners, nannies), unless the work is related to care or support.
Not being a public body or organization conducting more than 50% of its work in the public sector, unless it has charitable status.
Eligible businesses, charities, and community groups can claim the Employment Allowance, effectively reducing their NICs bill by up to £10,500 each tax year.
How Does the Employment Allowance Work?
For eligible employers, the Employment Allowance reduces their NICs liability until the full allowance of £10,500 is exhausted or until the tax year ends—whichever comes first. Here’s a simplified example to illustrate how this works under the new rates:
Scenario: An eligible small business with an annual NICs bill of £12,000.
Application of Employment Allowance: The first £10,500 of the NICs bill is covered by the Employment Allowance.
Remaining NICs Payment: The business is then only liable to pay the remaining £1,500 for the tax year.
Impact of Increased Employer NIC Rate and Reduced Threshold
The 2024 budget changes are a mixed bag for employers. While the higher Employment Allowance brings substantial savings, the increase in the employer NIC rate and the lowering of the NIC threshold may offset some of these benefits, particularly for businesses with higher payroll expenses.
1. Increased Employer NIC Rate
The rise from 13.8% to 15% means that employers will contribute a greater percentage of each employee's salary towards NICs. This increase can lead to higher payroll costs, especially for businesses with larger workforces or higher-paid employees.
2. Lower NIC Threshold
By reducing the NIC threshold from £9,100 to £5,000 per year, employers are now liable to pay NICs on more of each employee's earnings. Previously, employers would only pay NICs on earnings above £9,100. Now, any earnings above £5,000 will attract NICs at the new rate of 15%, further increasing the employer's NIC liability.
Practical Implications for Small Businesses
For many small businesses, these changes may be a double-edged sword:
Positive Impact: The £10,500 allowance could fully cover the NIC bill for very small businesses, especially those with few employees or part-time workers. This will provide a significant financial buffer, potentially freeing up funds for other business expenses.
Negative Impact: For businesses with larger payrolls, the combined effect of a lower threshold and higher NIC rate could increase overall payroll costs, despite the Employment Allowance increase. These businesses will need to budget carefully to accommodate the higher NIC liability.
How to Claim the Employment Allowance
Eligible employers can claim the Employment Allowance through their payroll software. The process is straightforward:
Check Eligibility: Confirm that your business meets the eligibility criteria.
Claim via Payroll Software: Most payroll software includes an option to claim the Employment Allowance. This can usually be selected as part of your payroll setup.
Notify HMRC: If claiming manually, inform HMRC that you are claiming the Employment Allowance for the tax year.
Once claimed, the allowance will automatically apply to your NICs calculations, reducing your liability until the full £10,500 is utilised.
Conclusion: Planning for the Changes
The increase in the Employment Allowance offers significant support to small businesses, effectively lightening the burden of NICs payments. However, with the simultaneous rise in employer NIC rates and the reduced threshold, some employers may find that they are still facing higher payroll costs overall.
Careful financial planning and review of payroll processes will be essential for businesses to fully understand and leverage the updated Employment Allowance. Employers may also want to explore options to improve efficiency or consider adjustments to staffing models to manage the increased NIC costs effectively.
For professional guidance on managing payroll costs and understanding these changes, feel free to reach out to our team at Duo Accountants. Our expertise in small business accounting ensures you stay compliant while making the most of the financial relief options available to you.