What is Employment Allowance?

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.

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.