Guidance

Eligibility for Employment Allowance: further employer guidance

Updated 15 February 2023

If you are unsure of your eligibility you should read this further guidance to help you decide if your business or charity is able to claim the Employment Allowance.

Whilst not exhaustive, the principles outlined in this guidance may be applied to a wide range of business situations.

1. Functions either wholly or mainly of a public nature

Functions are either wholly or mainly of a public nature, if you are carrying out more than 50% of your work in or for the public sector. For example:

• NHS services
• General Practitioner services
• the managing of housing stock owned by or for a local council
• providing a meals on wheels service for a local council
• refuse collection for a local council
• prison services
• collecting debt for a government department

You do not carry out a function of a public nature, if you are:

• providing security and cleaning services for a public building, such as government or local council offices
• supplying IT services for a government department or local council

Registered charities can claim the Employment Allowance, even if they are wholly or mainly carrying out functions of a public nature. This is subject to the connected rules for charities.

Also, if less than 50% of a businesses work is of a public nature, it will be entitled to the Employment Allowance. When considering the proportion of the business which is of a public nature this could be based on the number of employees engaged in public nature duties or the percentage of time spent on public nature duties. Alternatively, a business can consider turnover derived from the public nature activities.

1.1 Examples of functions wholly or mainly of a public nature

The local surgery has 5 General Practitioners (GPs), 2 nurses, 3 receptionists and a cleaner. The GPs are all partners in the practice. NHS patients make up 90% of the GP’s work. There is no entitlement to the Employment Allowance, because the majority of the work done, is wholly or mainly of a public nature.

A Council has set up a company limited by guarantee, which is an arm’s length management organisation (ALMO) whose sole responsibility is to look after the Council’s housing stock. The ALMO is not eligible for the Employment Allowance as it is carrying out functions of a public nature (managing housing stock which used to be the responsibility of the local authority).

1.2 Example of functions that are not wholly or mainly of a public nature

Guarding prisoners on behalf of the government makes up 25% of Padlock Security Limited’s business. The remaining 75% of the company’s work is providing security to private businesses and individual clients. Padlock Security Limited is entitled to the Employment Allowance because the majority of their work is not of a public nature.

2. Public authorities

Public authorities (such as local authorities, town councils and parish councils) are not eligible for the Employment Allowance unless they have charitable status.

3. Pharmacies

Independent pharmacies conducting a business, including over the counter sales as well as dispensing NHS prescriptions, are entitled to claim the Employment Allowance.

4. Educational Institutions

Schools, academies, further education colleges and universities are entitled to claim the Employment Allowance if they are private businesses or charities. This includes local authority or central government funded institutions provided they have charitable status.

If your institution or charity is connected to others, then there will be entitlement to just one allowance for all of the institutions or charities within the group. For example, an education trust which controls several academies will be entitled to just one allowance and it will be up to them to decide which academy makes the claim.

5. Domestic staff

Employers of domestic staff (for example, cleaners, gardeners or nannies) will be unable to claim the Employment Allowance, as the employees are all being employed in a personal capacity to support the running of a household.

6. Franchises

Where a person operates a franchise, the employer (franchise holder) will be entitled to the Employment Allowance. However, if the franchise holder controls more than one franchise of a business, there will only be entitlement to one Employment Allowance for all of the franchises of the business controlled by that franchise holder.

7. Self employed

If you’re self-employed, you can claim the Employment Allowance if you have employees and your business pays employer Class 1 NICs on your employees’ earnings.

8. Partnerships

You can claim Employment Allowance if your partnership employs anyone, and pays employer Class 1 NICs as a result.

9. Community Amateur Sports Clubs

A Community Amateur Sports Club (CASC) can claim the Employment Allowance if the CASC pays employer Class 1 NICs on its employees’ or directors’ earnings.

10. Personal and Managed Service Companies

You can not claim the allowance for any deemed payments of employment income. However, you can claim the Employment Allowance against the employers Class 1 NICs arising on the earnings paid to your employees. For more information about Service Companies and deemed payments.

11. Business takeovers

If your business takes over another business during a tax year, there will be no entitlement to any remaining balance of the Employment Allowance due from the employer’s Class 1 NICs for:

• the employees who worked for the business you have taken over
• the employees who are carrying on the work of the business you have taken over

This also applies to employees moved as part of regulations relating to Transfer of Undertakings (Protection of Employment), known as ‘TUPE transfers’.

11.1 Example of a business takeover and effect on entitlement to the Employment Allowance

A is self employed and owns a plumbing business with 2 employees. A claims the Employment Allowance in respect of the employer Class 1 NICs that are due on the earnings paid to the 2 employees.

During the year, A decides to sell his business to B, who owns an electrical business and who wishes to diversify into other areas. B completes the takeover on 1 November. B retains the 2 employees as they have plumbing expertise.

B is not entitled to any remaining unclaimed balance of the Employment Allowance on A’s former employees or for A’s former business irrespective of whether or not A’s employees are retained. B is, however, entitled to the Employment Allowance for the full year on his electrical business.

Any Employment Allowance already claimed by A prior to the business takeover does not become due to be repaid by A or B.

12. Business demergers

If your business splits during the tax year and creates new businesses there will be no entitlement to the Employment Allowance in that tax year for any of the new businesses.

12.1 Example of a business demerger and effect on entitlement to the Employment Allowance

A and his wife B run a hairdressing salon and are claiming the Employment Allowance on the employers Class 1 NICs arising on earnings paid to their employees.

In October, they decide to split the business. A takes all the male customers, B takes all the female customers, and they create 2 new companies.

The 2 new companies are not entitled to the Employment Allowance in the year that the business is split. They are also not entitled to any balance of the Employment Allowance that was unclaimed by the original business. In the next tax year, both businesses will be entitled to the Employment Allowance, provided they are not connected or excluded companies.

13. Connected businesses and charities

Companies are connected for the purpose of claiming the Employment Allowance if:

• a company has control of another company
• they are under the control of the same person or people, for example companies linked in a group

Charities are connected for the purpose of claiming the Employment Allowance if:

• the same person or connected people control 2 or more charities, and the charities share the same (or substantially similar) purpose and activities
• they belong to a group of charities

If a charity controls a trading business, they are also considered connected for the purposes of the Employment Allowance.

Where there are connected businesses or charities, only one business or charity will be entitled to claim the Employment Allowance, to be used against one PAYE scheme only. This is regardless of how many PAYE schemes the connected businesses/charities operate.

It is up to those businesses/charities to nominate which PAYE scheme to claim the Employment Allowance against.

If your business controls a charity, they are not connected for the purpose of claiming the Employment Allowance, and you can claim the Employment Allowance for both the company and the charity.

More information about connected companies and connected charities.

14. Limited companies with one employee (the director) paid above the secondary threshold

A limited company where the director is the only employee paid above the Secondary Threshold is not eligible to claim the Employment Allowance from 6 April 2016.

Claims for the Employment Allowance for previous years falling before 6 April 2016 are not affected.

If your limited company’s circumstances change during the year so that the company has more than one employed earner earning above the Secondary Threshold, your company can become eligible for the Employment Allowance for the whole year.

14.1 Examples

Limited company with one director and no further employees

Mr F is the sole director/employee of F Ltd. From 6 April 2016, F Ltd. will no longer be eligible to claim the Employment Allowance. F Ltd. should select ‘No’ in the ‘Employment Allowance Indicator’ field in its payroll records, and submit an Employment Payment Summary to HMRC confirming this change.

Limited company with one director and several employees, where the employees are paid below the Secondary Threshold

Mrs M, the director of M Ltd. Is paid above the Secondary Threshold. She has 4 employees, none of whom earn above the Secondary Threshold.

M Ltd will no longer be able to claim the Employment Allowance from April 2016. M Ltd. should select ‘No’ in the ‘Employment Allowance Indicator’ field in its payroll records, and submit an Employment Payment Summary to HMRC confirming this change.

Limited company who is initially unable to claim Employment Allowance in 2016 to 2017 but pays a further employee above the Secondary Threshold and becomes eligible.

X Ltd. is a company which employs a single paid director, Mr X, with no other employees. X Ltd. will not be eligible to claim the Employment Allowance from April 2016.

In June 2016 Mr X takes on a further employee, Mrs Y. Mrs Y is paid more than £156 per week. X Ltd. is now eligible to claim the Employment Allowance for the 2016 to 2017 tax year. If Mrs Y becomes a director of X Ltd. her annual earnings must be above the annual Secondary Threshold (£8,112 for 2016 to 2017) or the pro-rata equivalent to claim the Employment Allowance.

How to claim the Employment Allowance once the tax year has already started.

Limited company where the director earns below the Secondary Threshold but an employee does not

J Ltd. is a company which has one director and two other employees. The sole director, Mr L, and another employee Miss K, both receive earnings from J Ltd that fall below the Secondary Threshold (£156 a week in 2016 to 2017). The other employee, Mrs J earns above the Secondary Class 1 Threshold. JKL Ltd. will be able to claim the Employment Allowance.

Limited company with two directors, where both are paid above the secondary threshold

Q Ltd employs two paid directors. Both are paid above the Secondary Threshold (set at £8,112 a year in 2016 to 2017 for directors). The company is eligible to claim the Employment Allowance for the whole tax year.