NIM06575 | Employment Allowance: How the Employment Allowance is applied after HMRC has received a claim

National Insurance Contributions Act 2014 - Section 1, subsection (6) and Section 4

Current year claims

After HMRC has received a claim for the Employment Allowance, it is then set against the secondary class 1 NICs liabilities the employer is required to deduct when paying all of their employees, in accordance with the provisions within paragraph 6 of schedule 1 to the Social Security (Contributions & Benefits) Act 1992.

An employer must apply the Employment Allowance before applying any other deduction they are permitted which also reduces their secondary class 1 NICs liabilities.

The employer applies the Employment Allowance by setting it against their secondary Class 1 NICs liabilities arising on all of employees earnings combined, before they pay their PAYE bill to HMRC. The allowance may be claimed in one go or spread over more than one pay period during the tax year, up until the annual amount of the allowance has been exhausted. The annual amount of the Employment Allowance is published annually on the GOV.UK website.

The Employment Allowance is claimable per employer and not per staff member, so the employer may only reduce their secondary class 1 NICs bill up to the annual amount of the allowance, irrespective of how many staff they employ.

Example

At the outset of the 2021-22 tax year, an employee submits and EPS to claim the Employment Allowance.

In month one (April 2021) of that tax year, the employee incurs a £300 secondary class NICs liability on the wages to all their employees in that month. The employer claims £300 of the Employment Allowance which reduces their month one secondary Class 1 NICs liability to nil.

The employer then has £3700 of the allowance still available to set against future secondary Class 1 NICs liabilities arising in the remaining months of the tax year. The employer continues to claim the allowance against their secondary Class 1 NICs liabilities up until the annual amount (£4000 for 2021-22 tax year) has been used up.

Earlier year(s) claims

If an employer submits a valid claim for the Employment Allowance after a tax year has ended, HMRC will check the employer’s National Insurance records to see how much secondary class 1 NICs liabilities that employer has paid over to HMRC for that tax year.

If those secondary class 1 NICs liabilities paid were equal to, or exceeded, the annual amount of the Employment Allowance for that tax year, then HMRC will refund the employer an amount equivalent to that tax year’s annual amount of the allowance.

If those secondary class 1 NICs liabilities paid were below the annual amount of the Employment Alowance for that tax year, then HMRC will refund the employer an amount equivalent to the amount of secondary Class 1 NICs liabilities they have paid that year. Any unused balance of the Employment Allowance for that tax year cannot then be used to claim refunds of other tax/NIC liabilities paid over to HMRC in that same tax year (or other tax years).

Late payment interest will also be paid for this type of repayment. See NIM06585 for further details of how the repayment interest will be calculated.

See also NIM06585 for guidance on what happens when an employer is unable to use up the full annual amount of the Employment Allowance during a tax year.