Employment Allowance

As a business owner or human resources manager, you may come across the term "employment allowance," which refers to various allowances provided to employees to cover specific expenses incurred during their employment. These allowances can include travel, meals, accommodation, and other work-related costs. Understanding employment allowances is important because they can have tax implications for both the employer and the employee, and proper management ensures compliance with tax regulations.

For example, in South Africa, employers may provide a daily allowance to employees who are required to travel for work to cover meals and incidental expenses. As of 1 March 2021, an amount of R139 per day is deemed to have been actually expended by the employee for such purposes. Properly accounting for this allowance ensures that both the employer and employee adhere to the South African Revenue Service (SARS) guidelines, thereby maintaining compliance with tax laws.

Understanding Employment Allowance

Employment Allowance was introduced by the UK government to provide financial relief to businesses and encourage job creation. It enables eligible employers to reduce the amount of Employer's NICs they owe, helping to support growth, investment, and employment opportunities.

‍

Eligibility Criteria

To be eligible for Employment Allowance, businesses must meet the following criteria:

• Be a business or charity liable to pay Class 1 Employer's NICs on employees' earnings.
• Have eligible employees on the payroll, including directors, if they earn above the NICs Lower Earnings Limit.
• Not be connected to other companies or charities (unless they are part of a group structure).

There are some exclusions and restrictions for certain types of employment, such as personal and domestic work, and public sector employers are not eligible to claim Employment Allowance.

‍

Application Process

Eligible businesses can claim Employment Allowance through their payroll software or by using HM Revenue and Customs' (HMRC) online service. The process involves:

1. Verifying eligibility and ensuring compliance with the criteria.
2. Submitting the claim through the relevant payroll software or the HMRC online portal.
3. Applying the Employment Allowance deduction to reduce Employer's NICs liability in the payroll calculations.
4. Keeping records of the claim and any adjustments made to the NICs liability.

‍

Benefits of Employment Allowance

Employment Allowance offers several benefits for businesses, including:

• Cost Savings: By reducing Employer's NICs liability, businesses can lower their overall employment costs, freeing up funds for investment, growth, and hiring additional staff.
• Support for Small Businesses: Employment Allowance is particularly beneficial for small and medium-sized enterprises (SMEs) with tight budgets, helping them to compete more effectively in the marketplace.
• Encouragement for Job Creation: By incentivizing businesses to hire more employees, Employment Allowance contributes to job creation and economic growth, supporting the government's employment objectives.

‍

Considerations for Businesses

While Employment Allowance provides valuable tax relief for businesses, there are some considerations to keep in mind:

• Compliance Requirements: Businesses must ensure compliance with the eligibility criteria and accurately report their NICs liability to claim Employment Allowance.
• Impact on Cash Flow: While Employment Allowance can result in significant savings, businesses should consider the impact on cash flow, particularly if they are relying on the reduction in NICs to cover other expenses.
• Review of Payroll Processes: Employers should review their payroll processes to ensure they are set up correctly to claim Employment Allowance and accurately calculate NICs deductions.

‍

Employment Allowance FAQs

How much can businesses save through Employment Allowance?

Eligible businesses can claim up to a maximum of £4,000 per year (as of the current tax year) through Employment Allowance, which is deducted from their Employer's NICs liability.

Can businesses backdate their Employment Allowance claim?

Businesses can backdate their Employment Allowance claim for up to four years if they were eligible but did not claim in previous years. However, they must ensure compliance with HMRC guidelines and provide supporting documentation for the backdated claim.

Are there any changes to Employment Allowance in the current tax year?

The government periodically reviews and updates the rules and regulations governing Employment Allowance. Businesses should stay informed about any changes announced by HMRC to ensure compliance and maximize their tax savings.