Yesterday, Chancellor Rishi Sunak set out the Spring Statement which included a number of measures designed to help with the cost of living crisis.

The Chancellor announced an increase in the National Insurance (NI) threshold for the 2022 to 2023 tax year and an increase in NI contributions. 

He also said there would be a tax cut worth £1,000 for half a million small businesses, starting from April 6, 2022 and lasting one year. 

Speaking to Parliament on Wednesday, he said: "The Employment Allowance cuts small businesses tax bills, making it cheaper to employ workers." 

"In my first budget two years ago, I increased that allowance.

"Today, I'm going further. From April the Employment Allowance will increase to £5,000, that's a new tax cut worth up to £1,000 for half a million small businesses starting in just two weeks' time."

But what is Employment Allowance and how do you know if you are eligible? Here's everything you need to know.

What is Employment Allowance?

Employment Allowance is a tax relief scheme in the UK that allows eligible small business owners with employees to apply to reduce their annual National Insurance bill, usually by up to £4,000. 

However this year, Mr Sunak has increased the allowance to £5,000, meaning those that qualify can apply to lower their outgoings. 

If eligible, businesses pay less employers' Class 1 National Insurance each time the payroll has run until the £5,000 threshold is met or the tax year ends. 

Only businesses, charities, carers and support workers are allowed to apply for the tax cut. 

In addition, the employers' Class 1 National Insurance liabilities must be less than £100,000 in the previous tax year. 

If you have more than one employer PAYE reference, total employers’ Class 1 National Insurance liabilities for your combined payrolls must be less than £100,000 in the previous tax year.

Payments to one-off workers, such as contractors, do not count towards the £100,000 threshold. 

Find out more on the government website here. 

How to claim Employment Allowance

You can claim through your payroll software by writing 'Yes’ in the ‘Employment Allowance indicator’ field next time you send an Employment Payment Summary (EPS) to HM Revenue and Customs.

You can also use Basic PAYE Tools if your payroll software doesn't have an EPS.

The earlier you claim, the earlier you will get the allowance. 

You can claim Employment Allowance for the previous four tax years, dating back to the 2017/18 tax year.