Payroll

What is Employment Allowance?

Employment Allowance reduces your employer's NI bill by up to £10,500 per year (2025/26). Most small employers qualify.

Current Rate (2025/26)

Up to £10,500/year reduction in employer's NI (2025/26)

Example

Your employer's NI bill is £12,000. With Employment Allowance, you only pay £1,500.

Key Dates

Claim through your payroll software at start of tax year

How Employment Allowance Works in Practice

Employment Allowance is a government relief that allows eligible employers to reduce their annual employer's National Insurance liability by up to £10,500 (2025/26, increased from £5,000 in 2024/25). This means the first £10,500 of employer's NI you would otherwise owe to HMRC is wiped out, and you only pay anything above that.

The allowance was significantly increased in the October 2024 Budget alongside the rise in employer's NI rates, partly to offset the impact on small businesses. For many micro-businesses with one or two employees, Employment Allowance can eliminate the entire employer's NI bill.

To be eligible, your employer's NI liability in the previous tax year must have been below £100,000. This threshold means that virtually all small and medium businesses qualify. However, there are some exclusions: companies where the sole employee is also a director are not eligible (this is the most important exclusion for owner-managed companies); public sector employers and those carrying out more than 50% of their work in the public sector are excluded; and you can only claim for one company in a group of connected companies.

The exclusion for single-director companies is critical. If you are the sole director and employee of your company with no other staff, you cannot claim Employment Allowance. As soon as you take on a second employee (even part-time), you become eligible. This is an important consideration in the salary/dividend planning for director-shareholders.

Step by Step

Employment Allowance is claimed through your payroll software at the start of each tax year (April). You tick the Employment Allowance indicator in your Employment Payment Summary (EPS) submitted to HMRC. The allowance is then applied automatically against your monthly employer's NI liability.

Each month, instead of paying the full employer's NI to HMRC, the Employment Allowance reduces what you owe. For example, if your monthly employer's NI is £1,500, you pay nothing for the first seven months (£1,500 x 7 = £10,500 allowance used up). From month eight onwards, you pay the full £1,500. If your annual employer's NI is less than £10,500, you pay zero employer's NI for the entire year.

You must claim Employment Allowance each tax year - it does not carry forward automatically. If you forget to claim at the start of the year, you can claim later and the software will apply it retrospectively. You can also amend previous years' claims if you discover you were eligible but did not claim, going back up to four years.

Practical Tips

Set a reminder for 6 April each year to confirm Employment Allowance is claimed in your payroll software - this is easy to overlook and costs you money every month you miss it
If you are a sole director considering taking on your first employee, factor Employment Allowance into your cost calculations - it can make the first hire significantly cheaper
Check whether you qualify by reviewing your employer's NI liability for the previous tax year - the £100,000 threshold is generous and catches virtually all small businesses
If you have connected companies, decide which company should claim the allowance - typically the one with the highest employer's NI bill to maximise the benefit

Common Mistakes to Avoid

Not claiming Employment Allowance because you did not know it exists - this is free money that many eligible employers miss, especially in the first year of having employees
Claiming Employment Allowance as a single-director company with no other employees, which is not allowed and could result in HMRC clawing back the relief
Forgetting to re-claim Employment Allowance each April - the claim does not roll over automatically between tax years
Claiming on multiple companies in a connected group when only one company in the group is entitled to the allowance

Frequently Asked Questions

Can I claim Employment Allowance if I am the only director and employee?

No. If the sole employee of your company is also a director, you are excluded from Employment Allowance. You become eligible as soon as you employ at least one other person alongside the director, even if they are part-time.

How much is Employment Allowance for 2025/26?

The Employment Allowance is £10,500 for 2025/26, increased from £5,000 in 2024/25. This means the first £10,500 of your employer's NI bill is eliminated. If your total employer's NI is less than £10,500, you pay nothing.

How do I claim Employment Allowance?

Claim through your payroll software by selecting the Employment Allowance indicator. This is submitted to HMRC as part of your Employment Payment Summary (EPS). Most payroll software will prompt you at the start of the tax year, but check to make sure it is enabled.

Can I claim Employment Allowance for previous years if I forgot?

Yes. You can make a retrospective claim for Employment Allowance for up to four previous tax years. Contact HMRC or amend through your payroll software. If you have been paying employer's NI unnecessarily, HMRC will issue a refund.

Does Employment Allowance apply per employee or per company?

Per company. It is a single annual allowance of £10,500 that offsets your total employer's NI liability across all employees. You cannot claim £10,500 per employee.

Source: HMRC Employment Allowance guidance - Check if you can claim Employment Allowance; National Insurance Manual NIM15000

Related Terms

Employer's National Insurance

Employer's NI is the National Insurance contribution employers must pay on top of employee wages - an additional employment cost.

PAYE (Pay As You Earn)

PAYE is the system employers use to deduct Income Tax and National Insurance from employee wages before paying them.

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