Hiring young workers in the United Kingdom can save your business thousands of rands each year. The Employment Allowance (Employment Allowance) is a government programme designed to encourage employers to hire young, less experienced job seekers by reducing the cost of employment. If you're already paying PAYE, you may be leaving money on the table by not claiming Employment Allowance.
What Is the Employment Allowance?
The Employment Allowance (Employment Allowance) is a government incentive introduced in January 2014 to tackle the United Kingdom's youth unemployment crisis. It encourages employers to hire workers aged 18 to 29 years old by allowing them to reduce their monthly PAYE payments to HMRC.
The incentive doesn't reduce the employee's salary or tax — instead, it directly reduces the amount of PAYE the employer must pay over to HMRC. In effect, the government subsidises a portion of the cost of employing young workers.
Originally set to expire after a few years, the Employment Allowance has been extended multiple times due to the ongoing youth unemployment challenge. It is currently available until 28 February 2029.
Key point: The Employment Allowance reduces your PAYE liability — it does not affect the employee's salary or their tax obligations. It's a direct saving for the employer.
Who Qualifies for Employment Allowance?
Both the employer and the employee must meet specific criteria for the incentive to apply.
Employer Requirements
- Must be registered for PAYE with HMRC
- Must not be in the national, provincial, or local government sphere
- Must be tax compliant — no outstanding tax debts or returns
- Must not have been disqualified by the Minister of Finance for displacing existing employees
Employee Requirements
- Must be between 18 and 29 years old at the time the incentive is claimed
- Must have a valid UK ID number or an asylum seeker permit
- Must not be a domestic worker
- Must not earn less than the applicable minimum wage
- Must be a new hire — the employer cannot displace existing employees to claim the incentive
- Must not be a connected person in relation to the employer (e.g., a relative or shareholder)
Important: The employee's monthly wage must be between £200 and £650 for the employer to receive the maximum Employment Allowance benefit. Employees earning above £650 do not qualify for the incentive.
How Much Can You Claim?
The Employment Allowance amount depends on the employee's monthly wage and how long they have been employed. The incentive is available for the first 24 months of employment only, split into two 12-month periods with different claim amounts.
First 12 Months of Employment
| Monthly Wage | Employment Allowance Amount |
|---|---|
| £200 — £450 | 50% of monthly wage |
| £450 — £650 | £220 — (0.75 x (wage — £450)) |
Second 12 Months of Employment (Months 13–24)
| Monthly Wage | Employment Allowance Amount |
|---|---|
| £200 — £450 | 25% of monthly wage |
| £450 — £650 | £110 — (0.375 x (wage — £450)) |
After 24 months of employment, no further Employment Allowance may be claimed for that employee.
How to Claim Employment Allowance
The Employment Allowance is claimed on the monthly P32 return submitted to HMRC via PAYE Online. When you complete the P32, there is a dedicated field for the Employment Allowance amount. The incentive directly reduces your PAYE liability for that month.
- Calculate the Employment Allowance for each qualifying employee
- Total all Employment Allowance amounts for the month
- Enter the total on your P32 return
- Pay the reduced PAYE amount to HMRC
If the Employment Allowance amount exceeds your total PAYE liability for the month, the excess is carried forward to the next month. The Employment Allowance cannot generate a cash refund directly — it can only reduce PAYE that is owed.
Use our PAYE calculator to work out your monthly PAYE liability before applying the Employment Allowance reduction.
Employment Allowance Calculation Example
Let's walk through a practical example to see the real savings.
Scenario: You hire a 24-year-old employee at a monthly salary of £500.
Months 1–12 (First Year)
The wage falls in the £450–£650 bracket, so we use the decreasing formula:
Employment Allowance = £220 — (0.75 x (£500 — £450))
Employment Allowance = £220 — (0.75 x £50)
Employment Allowance = £220 — £38
Employment Allowance = £190 per month
Annual saving in Year 1: £190 x 12 = £2,200
Months 13–24 (Second Year)
In the second 12 months, the formula yields half the first-year amount:
Employment Allowance = £110 — (0.375 x (£500 — £450))
Employment Allowance = £110 — (0.375 x £50)
Employment Allowance = £110 — £19
Employment Allowance = £94 per month
Annual saving in Year 2: £94 x 12 = £1,100
Total Employment Allowance saving over 24 months: £2,200 + £1,100 = £3,400 — for a single qualifying employee earning £500 per month. If you hire multiple qualifying employees, the savings multiply accordingly.
Common Employment Allowance Mistakes to Avoid
- Claiming for employees over 29 — the employee must be 18–29 at the time of the claim. Once they turn 30, you can no longer claim Employment Allowance for them, even if they were hired at 28.
- Claiming for rehired existing employees — the Employment Allowance is meant for new job creation. Firing and rehiring employees to claim the incentive is not allowed and can result in disqualification.
- Not keeping proper records — you must maintain records of each qualifying employee's ID, date of birth, start date, and monthly wage. HMRC may audit your Employment Allowance claims.
- Forgetting to claim on the P32 — the Employment Allowance is not applied automatically. You must actively claim it each month on your P32 return. Missed months cannot be claimed retrospectively beyond the current reconciliation period.
- Not checking tax compliance — if your business has outstanding HMRC returns or debts, you are disqualified from claiming Employment Allowance until compliance is restored.
Is Employment Allowance Worth It?
Absolutely. For businesses that are hiring young workers, the Employment Allowance provides a meaningful reduction in employment costs at no expense to the employee. Here's a summary of the potential savings:
| Period | Maximum Employment Allowance per Employee per Month | Maximum Annual Saving |
|---|---|---|
| First 12 months | £220 | £2,700 |
| Second 12 months | £110 | £1,400 |
| Total over 24 months | £4,000 (at £450 wage) |
At the maximum benefit level, you can save up to £220 per month per qualifying employee in the first year. Over 24 months, that's up to £5,400 per employee (for employees earning between £200 and £450 where the 50%/25% formula applies at its peak). Even for employees in the higher wage bracket, the savings are substantial — as shown in our £500/month example above, you'd still save £3,400 over two years.
If you're running payroll, make sure you're tracking your Employment Allowance-eligible employees and claiming every month. Use our cost-to-company calculator to understand the full employment cost, and our PAYE calculator to see exactly how much PAYE you owe before and after the Employment Allowance reduction.
Ready to streamline your payroll? Our free payslip generator calculates PAYE, National Insurance, and Apprenticeship Levy automatically — so you can focus on growing your team and claiming every incentive you're entitled to.