Employment Allowance: What It Is and Who Can Claim
The Employment Allowance lets eligible employers reduce their employer National Insurance contributions (NICs) bill by up to £10,500 per tax year. If your business qualifies, you simply claim it through your payroll software and HMRC deducts the allowance from your employer NIC liability as you run payroll each month. You do not need to apply separately or wait for a rebate.
This article explains exactly how it works in 2025/26, who can claim, who cannot, and what you need to do to make sure you are not missing out on money you are entitled to.
How the Employment Allowance Works
In 2025/26, the Employment Allowance is worth up to £10,500. It reduces the amount of employer NICs you pay each time you run payroll, until either the full £10,500 has been used up or the tax year ends — whichever comes first.
Employer NICs in 2025/26 are charged at 15% on employee earnings above £5,000 per year. For a small business with a modest wage bill, the Employment Allowance can wipe out the employer NIC liability entirely. For larger businesses, it simply reduces what they owe.
The allowance applies to the total employer NIC bill across all employees. It is not calculated per employee — it is an offset against your overall employer NIC account.
A Simple Example
Suppose your business has three employees and your total employer NIC liability for the year is £8,200. Because that is below £10,500, the Employment Allowance covers it in full. You pay no employer NICs at all for that year.
If your employer NIC bill is £14,000, you claim the £10,500 allowance and pay the remaining £3,500.
Who Can Claim the Employment Allowance
Most UK businesses and charities that run a payroll and pay employer NICs can claim. The main eligible groups are:
- Limited companies with at least one employee who is not the sole director
- Partnerships where at least one partner is not the only employee
- Sole traders who employ staff (other than close family members in certain circumstances)
- Charities and community amateur sports clubs
- Businesses in the construction sector, provided they meet the general eligibility rules
- Care and healthcare businesses that employ support workers or admin staff
- E-commerce businesses with employees on the payroll
The Employment Allowance is also available to agencies and freelancers who operate through a company and have at least one other employee on the payroll alongside the director.
Who Cannot Claim the Employment Allowance
HMRC sets out clear rules on who is excluded. You cannot claim if:
- You are a limited company where the only employee paid above the secondary NIC threshold is the director themselves. This is the most common reason small one-person companies are excluded.
- You are a public body or a business that carries out more than half its work in the public sector (unless you are a charity).
- Your employer NIC liability in the previous tax year was £100,000 or more. From April 2020, HMRC introduced this cap to target the relief at smaller employers.
- You are a personal or household employer — for example, someone who employs a carer or nanny for personal use rather than for a business purpose.
- You use a service company and the IR35 rules apply to the workers involved.
The Single-Director Company Rule Explained
This catches a lot of small limited company directors off guard. If you run a one-person limited company, pay yourself a director’s salary, and have no other employees on the payroll, you cannot claim the Employment Allowance. The rules require that at least one employee (other than the sole director) is paid above the secondary NIC threshold of £5,000 in 2025/26.
If you bring on even one part-time employee above that threshold, you then become eligible. This is worth bearing in mind if you are planning to take on staff.
How to Claim the Employment Allowance
You claim through your payroll software when submitting your Employer Payment Summary (EPS) to HMRC. There is no separate form to fill in.
The process is straightforward:
- Open your payroll software and navigate to the employer settings or payroll run area.
- Find the Employment Allowance option and select that you want to claim it for the current tax year.
- Confirm your eligibility — most software will ask whether your employer NIC bill in the previous year was under £100,000 and whether you are not an excluded employer.
- Submit your EPS. HMRC records the claim against your PAYE reference.
- Your software will then automatically reduce your employer NIC payments each month until the £10,500 is used up.
You need to claim each tax year. The claim does not roll over automatically from one year to the next. If you missed claiming in a previous year, you can backdate claims up to four years. Contact HMRC or speak to your accountant about how to do this correctly.
Connected Companies and the £10,500 Cap
If you own or control multiple businesses, they are treated as connected employers for Employment Allowance purposes. Connected employers can only claim one Employment Allowance between them — not one each. You nominate which business will claim it.
HMRC’s definition of connected companies broadly follows the corporation tax rules on associated companies. If you are unsure whether your businesses are connected, check the latest HMRC guidance or speak to an accountant.
Employment Allowance and State Aid Rules
Following Brexit, the Employment Allowance is no longer classified as de minimis state aid for most businesses. HMRC removed this classification from April 2022. For the vast majority of employers, this means you no longer need to consider state aid limits when claiming.
However, if your business operates in a sector that is still subject to specific subsidy controls — such as agriculture, fisheries, or road freight transport — you should check whether any sector-specific rules apply. For most small businesses in the UK, this will not be relevant.
Employment Allowance and the Director’s Salary Strategy
Many limited company directors pay themselves a small salary up to the National Insurance secondary threshold (£5,000 in 2025/26) specifically to avoid triggering employer NICs. This is a deliberate tax planning approach.
If you are eligible for the Employment Allowance — for example, because you have another employee on the payroll — it can change this calculation. With the allowance available, there may be a case for paying a higher salary up to the personal allowance of £12,570, because the Employment Allowance could offset any employer NICs arising. The overall tax position depends on your specific circumstances, including your corporation tax rate and personal tax position.
This kind of salary and dividend planning is worth reviewing with an accountant each year rather than assuming last year’s approach is still optimal.
Common Mistakes When Claiming
Forgetting to Re-Claim Each Year
The Employment Allowance does not carry forward. You must actively claim it at the start of each tax year through your payroll software. Many businesses lose months of the allowance simply because they forget to tick the box when they run the first payroll of the new tax year.
Claiming When Not Eligible
Single-director companies with no other employees regularly claim the Employment Allowance incorrectly. HMRC will claw this back. If you are unsure whether you qualify, check before you claim.
Not Backdating Prior Year Claims
If you were eligible in a previous year but did not claim, you can go back up to four years. For some businesses, this could mean a significant refund or credit against future PAYE liabilities. The backdating process involves submitting a corrected EPS for the relevant year.
Missing the Allowance Due to Mid-Year Staff Changes
If you hire your first employee part-way through the tax year, you become eligible from that point. Make sure your payroll software reflects the claim from the date you become eligible, not just from the start of the next tax year.
Employment Allowance for Specific Business Types
Construction and Trades Businesses
Construction businesses that employ staff directly — rather than relying entirely on subcontractors through the Construction Industry Scheme — can benefit significantly from the Employment Allowance. If you have labourers, site managers, or office staff on PAYE, the allowance reduces your employer NIC costs. Proper CIS returns and payroll need to be kept separate and accurate.
Healthcare Businesses
Private GP practices, dental practices, care agencies, and other healthcare businesses with employed staff are generally eligible. Given that healthcare businesses often carry significant staffing costs, the Employment Allowance can make a material difference to monthly cash flow.
E-Commerce Businesses
An e-commerce business that has grown to the point of employing warehouse staff, customer service agents, or marketing employees will typically qualify. As the business scales, keeping a close eye on payroll costs — including what can be offset through the Employment Allowance — forms part of sound management accounts practice.
Charities
Charities are eligible regardless of their employer NIC bill size, even if it exceeded £100,000 in the previous year. This is a specific exception to the general £100,000 cap rule.
How the Employment Allowance Affects Your Cash Flow
For a small business with a modest payroll, the Employment Allowance can effectively eliminate employer NIC costs for the entire year. That is a real reduction in monthly outgoings from the very first payroll run of the tax year.
If your employer NIC bill is £8,000 for the year, you have roughly £667 per month that you do not need to pay to HMRC under PAYE. Over the course of a year, that is money that stays in the business. For businesses watching their cash flow carefully, claiming the allowance from day one of the tax year — rather than mid-year — makes a tangible difference.
Keeping Your Payroll Records Straight
To claim the Employment Allowance correctly and avoid HMRC queries, your payroll records need to be accurate and up to date. That means running a full payroll each pay period, submitting Real Time Information (RTI) on time, and correctly recording employer NIC deductions.
If your payroll is managed in-house, make sure whoever runs it understands the eligibility rules. If you outsource payroll to an accountant or bureau, confirm with them that the Employment Allowance has been claimed for the current tax year and that the claim is reflected in your monthly PAYE payments.
Good bookkeeping means employer NIC costs and the Employment Allowance offset are correctly recorded in your accounts. This matters when you review profitability and when preparing your annual accounts.
Frequently Asked Questions
Can I claim the Employment Allowance if I am a sole trader with one employee?
Yes, provided that employee is not a family member employed in a domestic capacity. A sole trader employing a member of staff for genuine business purposes can claim the Employment Allowance against the employer NICs arising from that employment.
Can I claim the Employment Allowance and the small business relief at the same time?
These are separate reliefs and one does not affect the other. The Employment Allowance reduces employer NICs. Small business rate relief applies to business rates. You can benefit from both if you qualify for each.
What happens if I overclaim?
HMRC will identify the overclaim and issue a notice requiring repayment, potentially with interest. If you are unsure about your eligibility, confirm before submitting the claim rather than assuming and correcting later.
Does the Employment Allowance affect my corporation tax deduction?
Yes. If you claim the Employment Allowance and pay less employer NICs as a result, the actual employer NICs you pay are still deductible as a business expense. You cannot deduct NICs you never paid. The allowance reduces your NIC liability, so your deductible NIC costs will be correspondingly lower. The corporation tax saving from the wages deduction remains unaffected.
The Employment Allowance is one of the most straightforward reliefs available to small employers. It requires no complicated calculations and no separate HMRC application — just a single selection in your payroll software at the start of the tax year. If you are eligible and not claiming it, you are paying more employer NICs than you need to. Check your eligibility, make the claim, and make sure it is renewed each April.
If you want help reviewing your payroll setup, checking eligibility, or backdating a missed claim, speak to an accountant who understands small business payroll. Getting this right is straightforward with the right support.
