Employment Allowance 2025/26

Employment Allowance can be a very useful relief for small employers, allowing you to reduce your employer National Insurance bill and free up cash to invest back into your business.

Agile Accountants work with owner managed limited companies and fast growth start-ups across the UK. Our guide sets out exactly what you need to know about Employment Allowance.

What is Employment Allowance?

A simple definition

Employment Allowance is a government relief that lets eligible employers reduce their annual employers Class 1 National Insurance contributions (NICs) bill. Instead of paying all of your NICs over to HMRC, you can use the allowance to cover some or all of the cost.

You claim it through your payroll, and it automatically reduces how much employer NIC you pay each time you run payroll until the full allowance has been used or the tax year ends.

How much can you claim now?

From 6 April 2025, the Employment Allowance for is up to £10,500 per tax year.

A few key points:

• The £10,500 is a maximum. If your employer NIC bill for the year is lower, you can only claim up to the amount you actually owe.
• The allowance is per employer, not per employee or per PAYE scheme. If you operate more than one PAYE scheme, you must choose which one to claim against.
• Only one company in a group of connected companies can claim.

Who can claim Employment Allowance?

Basic eligibility rules

You can normally claim Employment Allowance for the current tax year if:

• You are a business or charity (including community amateur sports clubs).
• You pay employers Class 1 NICs on your employees’ wages.
• You do less than half of your work in the public sector (there are some exceptions).

From April 2025, the older rule that blocked employers with more than £100,000 of employer Class 1 NICs in the previous year from claiming has been removed. That means larger employers may now be able to claim too.

Important exclusions for small limited companies

Some common situations where you cannot claim:

• Single director only payroll
  If your limited company has only one director on the payroll and no other employees who pay employer NICs, you are not eligible for Employment Allowance.
• Off payroll workers (IR35)
  You cannot claim Employment Allowance against liabilities for workers who fall under the off payroll working rules (inside IR35).
• Domestic or personal employees
  You generally cannot claim if you only employ someone for personal, household or domestic work, such as a nanny or gardener, unless they are a carer or support worker.

If you are unsure whether your structure qualifies, the official GOV.UK Employment Allowance eligibility page is a good starting point, and we can help you interpret it for your specific setup.

What changed for Employment Allowance in April 2025?

April 2025 brought in some significant changes that business owners should be aware of:

Larger allowance and NIC changes

From April 2025:

• Employment Allowance increased from £5,000 to £10,500 per year.
• Employer NIC (secondary Class 1 rate) increased to 15%.
• The secondary threshold (where employer NIC starts) reduced to £5,000 per year.

The idea is that while NIC costs are rising, Employment Allowance gives employers a bigger buffer at the start of the year.

More employers can now qualify

The removal of the £100,000 NIC cap means that some employers who were previously excluded can now claim, as long as they meet the other eligibility criteria.

The rules around connected companies, public sector work and single director companies still apply, so it is worth checking the detail or asking your accountant to confirm your position.

Employment Allowance examples: how much could you save?

Sometimes the numbers are easier to understand with real world examples.

Example 1: small employer with NIC of £8,000

Imagine your limited company has a Class 1 employer NIC bill of £8,000 for the year.

• You are eligible for Employment Allowance.
• The maximum allowance is £10,500, but your NIC bill is only £8,000.

In this case, Employment Allowance wipes out your entire £8,000 employer NIC bill for the year. You pay no employer NIC until the allowance is used up, which is likely to be towards the end of the tax year if you have a stable payroll.

Example 2: growing business with NIC of £20,000

Now imagine a fast growth business with a Class 1 employer NIC bill of £20,000.

• You are eligible for Employment Allowance.
• You claim the full £10,500 allowance.

You still have £9,500 of NIC to pay, but the allowance has reduced your bill by more than half. That £10,500 saving could fund a part time hire, increase marketing spend or simply ease cash flow.

Example 3: single director company with one salary

You operate a small limited company with a sole director who is the only employee on the payroll:

• The director takes a salary above the secondary threshold.
• There are no other employees.

In this case, even if you pay employer NIC, you are not eligible for Employment Allowance because the director is the only employee liable for secondary Class 1 NIC.

How to claim Employment Allowance in practice

Claiming through your payroll software

Employment Allowance is claimed via your payroll, not through a separate form. In most payroll software you will:

1. Tick an option or set an indicator to say you are claiming Employment Allowance for the tax year.
2. Send an Employer Payment Summary (EPS) to HMRC with the Employment Allowance indicator set to 'Yes'.

HMRC then automatically reduces the employer NIC due each time you run payroll until the allowance is used.

Do you need to claim every year?

Yes. Employment Allowance is not a one off claim. You must:

• Re confirm your claim in your payroll software every tax year, and
• Keep checking that you remain eligible, especially if your structure changes or you become part of a group of connected companies. 

Backdating Employment Allowance

You can usually backdate a claim for up to four previous tax years, as long as you met the conditions in each of those years.

If you have been employing staff for a while but have never claimed, there may be a refund opportunity. The rules for earlier years are slightly different, so this is an area where professional advice is particularly useful.

Common Employment Allowance pitfalls for small companies

1. Assuming it applies automatically

Employment Allowance is not applied automatically by HMRC. If you or your payroll provider do not tick the right box and send the EPS, you will not receive the relief.

2. Forgetting about connected companies

If you have more than one company under common control, only one of them can claim the allowance each year. Picking the right company within the group can make a noticeable difference to your overall NIC bill.

3. Single director payrolls claiming when they should not

As mentioned earlier, most single director companies with no other employees are not eligible. HMRC guidance on single director companies and Employment Allowance is very clear on this point, and incorrect claims can be clawed back.

If you are unsure, it is far better to check than to claim and have to repay later.

How Agile Accountants can help with Employment Allowance

As a Birmingham based firm working with limited companies across the UK, we build Employment Allowance into our wider payroll and tax planning work.

We can help you to:

• Check eligibility
  Review your payroll, ownership structure and sector to confirm whether you can claim under the latest HMRC rules.
• Make and maintain the claim
  Set up Employment Allowance correctly in your payroll software, ensure it is claimed each year and adjust quickly if your circumstances change.
• Backdate where possible
  Review previous years and identify whether there is scope to claim Employment Allowance retrospectively.
• Plan around wider NIC changes
  Combine Employment Allowance with other planning, such as optimal director salary levels, staff cost budgeting and forecasting.

If you would like us to review whether your company is making the most of Employment Allowance, or you are not sure if you qualify at all, get in touch with the Agile Accountants team and we will walk you through it step by step.