Employment Allowance Explained: Reducing Your Employer National Insurance Bill

Employment Allowance Explained: Reducing Your Employer National Insurance Bill

For many UK businesses, employer National Insurance contributions represent a significant ongoing cost. Employment Allowance is a government-backed scheme designed to help towards that cost. Understanding how the allowance works and whether your business qualifies could save you thousands of pounds each year.

Here we explain what Employment Allowance is, who can claim it, how much it is worth, and how to avoid common pitfalls.

What is Employment Allowance?

Employment Allowance enables eligible employers to reduce their annual employer Class 1 National Insurance liability by up to £10,500 per tax year. The allowance is applied through payroll and automatically offsets employer National Insurance each time payroll is run. It continues to reduce the amount due until the allowance is fully used or the tax year ends on 5 April.

Who is eligible to claim?

For the 2025/26 tax year, Employment Allowance is available to businesses, charities and community amateur sports clubs that pay employer Class 1 National Insurance contributions and employ at least one person. In most cases, the business must have an employee in addition to any company director, unless there are multiple directors on the payroll.

Who cannot claim Employment Allowance?

Certain employers are excluded from claiming Employment Allowance. Sole traders with no employees cannot claim because they do not pay employer National Insurance. Limited companies with only one director, where that director is the sole employee paid above the secondary threshold, are also generally ineligible.

Where a business operates more than one PAYE scheme, Employment Allowance can only be claimed against one scheme. If several companies are connected or under common control, only one company within the group is permitted to claim the allowance.

Because eligibility rules have changed multiple times since Employment Allowance was introduced, it is important to review your position each tax year rather than assuming you still qualify.

How much is Employment Allowance worth?

For the 2025/26 tax year, Employment Allowance is worth up to £10,500. This represents a substantial increase from the £5,000 available in the previous tax year.

The allowance works by reducing your employer Class 1 National Insurance bill as payroll is processed throughout the year. If your total employer National Insurance liability is less than £10,500, it can be reduced to zero. If it exceeds £10,500, the allowance will be capped at that amount and normal National Insurance will apply thereafter.

Any unused Employment Allowance cannot be carried forward to a future tax year, so it is important to claim it in time.

How do you claim Employment Allowance?

If we process your payroll we will make your claim automatically. You will not need to do anything. If you do your own payroll you can claim as follows:

Employment Allowance is claimed through payroll by submitting an Employer Payment Summary to HMRC. Most payroll software includes an option to activate Employment Allowance as part of the EPS submission. Once the claim is made, the allowance is applied automatically as payroll is run.

The claim only needs to be submitted once per tax year. If you do not use commercial payroll software, HMRC’s Basic PAYE Tools can be used instead.

Common mistakes businesses make

One of the most common mistakes is forgetting to renew the claim at the start of a new tax year. Although HMRC systems may carry the claim forward automatically, this is not guaranteed, and HMRC advises employers to make a fresh claim each year.

Another frequent issue is missing out on backdated claims. If you forget to claim in April, you can still activate Employment Allowance later in the year and receive the full annual benefit. In some cases, it may also be possible to claim Employment Allowance for up to four previous tax years if you were eligible but did not claim.

Poor record keeping can also cause problems. HMRC may ask for evidence to support your eligibility, and records relating to Employment Allowance should be retained for at least three years.

Public sector rules are often misunderstood, with businesses excluding themselves unnecessarily due to small public sector contracts. The restriction only applies where 50 percent or more of the work is public sector related.

Single-director companies commonly assume they qualify simply because they are small, but in most cases they are not eligible without additional employees. Businesses with multiple connected companies also sometimes claim incorrectly, even though only one company in the group is permitted to claim.

How we can help

Employment Allowance can deliver meaningful savings, but the rules are not always straightforward. We can review your eligibility, ensure your payroll is set up correctly, identify missed or backdated claims, and help you remain compliant if your circumstances change.

If you would like advice on whether your business can benefit from Employment Allowance, or if you want help claiming it correctly, please contact us though this website.