The Employment Allowance lets eligible UK employers reduce their annual employer National Insurance Contributions (NICs) bill by up to £5,000 per tax year. Introduced in 2014 and progressively increased, the allowance is claimed through payroll software and applied month-by-month until the £5,000 is exhausted. For a small business with one or two employees, the Employment Allowance can eliminate the entire employer NIC bill for the year.
Quick answer: If you employ staff, pay employer NICs, and your total employer NIC bill was under £100,000 in the previous tax year, you are almost certainly eligible. Claim it through your payroll software at the start of the tax year — it is free money that reduces your NICs bill by up to £5,000.
Employment Allowance Key Facts 2026/27
| Detail | Amount / Rule |
|---|---|
| Maximum allowance | £5,000 per year |
| Applies to | Employer (secondary) Class 1 NICs |
| Previous year NIC threshold | Must be under £100,000 |
| Number of employers | One allowance per employer (connected companies share one) |
| How to claim | Via payroll FPS/EPS submission — tick “Employment Allowance: Yes” |
| Unused allowance | Carries through the year but does not roll to next year |
Who Is Eligible?
You can claim the Employment Allowance if:
- You are a business, limited company, partnership, or sole trader with at least one employee
- You are a charity or community amateur sports club (CASC)
- Your secondary Class 1 NIC liability was under £100,000 in the prior tax year
Who CANNOT Claim
| Ineligible Category | Reason |
|---|---|
| Sole director with no other staff | The only employee is also the director |
| Public authorities (councils, NHS bodies) | Funded by public money |
| Domestic employers (nannies, cleaners at home) | Personal household employment |
| Connected companies already claiming | One allowance per connected group |
| Employers whose prior-year NIC was £100,000+ | Above the threshold |
The sole director rule explained: If you run a one-person limited company as the sole director and you are the only person on the payroll, you cannot claim the Employment Allowance. The moment you employ even one other person (employee, not another director), you become eligible.
How Much National Insurance Can You Save?
Worked example — small employer:
A family bakery has 3 part-time staff. Total employer NICs (at 15% secondary rate for 2025/26 onwards) for the year: £7,800.
With Employment Allowance: £7,800 − £5,000 = £2,800 actual NIC bill (saving £5,000).
Worked example — freelancer with one employee:
A self-employed designer hires a part-time assistant. Gross wage £15,000/year. Employer NICs:
- NIC on earnings above secondary threshold (~£5,000 for 2025/26): (£15,000 − £5,000) × 15% = £1,500
- Employment Allowance covers all £1,500 — employer NIC bill: £0
Many small employers with low payrolls pay zero employer NICs thanks to the allowance.
Impact of the 2025 Autumn Budget Changes
The October 2024 Autumn Budget announced significant changes to employer NICs from April 2025:
- Employer NIC rate increased from 13.8% to 15% on employee earnings above the secondary threshold
- Secondary threshold reduced from £9,100 to £5,000 — meaning employer NICs apply from a lower earnings level
- Employment Allowance increased from £5,000 to remain at £5,000 (the amount did not change but the threshold eligibility changed)
The effective result: from April 2025, employer NICs are higher — but the Employment Allowance partially offsets this for small employers. Businesses with a payroll bill over ~£33,000/year (per employee) will pay significantly more overall; those with smaller payrolls are partially shielded by the allowance.
De Minimis State Aid Rules
The Employment Allowance is classified as de minimis state aid — a category of small government subsidy permitted under UK/WTO rules. When you claim, you must confirm which sector your business operates in (agriculture, road freight transport, or general). Most businesses select “general” and can claim up to €300,000 in de minimis aid over 3 rolling years (well above the £5,000 allowance).
This categorisation has minimal practical impact for most small businesses — simply select the correct sector when prompted by your payroll software.
How to Claim
Step 1: At the start of each new tax year, check your payroll software for the Employment Allowance declaration. This is typically on the Employer Payment Summary (EPS) or in the setup for your first Full Payment Submission (FPS).
Step 2: Select “Employment Allowance: Yes” and confirm the de minimis state aid category.
Step 3: Your allowance is applied automatically. Each month’s employer NIC payment is reduced until the £5,000 is used up — after that, normal NICs resume.
If you forgot to claim earlier in the year: You can submit a late EPS to HMRC to claim mid-year. Any overpaid NICs for earlier months will be offset against future payments.
Popular payroll software: Xero, QuickBooks, Sage Payroll, FreeAgent, and Moneysoft all support Employment Allowance claims automatically.
Employment Allowance and Making Tax Digital
HMRC’s Making Tax Digital (MTD) programme is progressively extending to more businesses. The Employment Allowance is claimed through existing PAYE RTI submissions — this process is not directly affected by MTD, but using MTD-compatible payroll software ensures compliance across all areas.
Related UK Small Business and Tax Resources
- UK National Insurance Guide — full NIC rates, thresholds and classes
- HMRC Mileage Rates 2026/27 — business mileage tax relief
- UK Self-Employed Tax Guide — Class 2, Class 4 NI, and Self Assessment
- UK Taxes Hub — complete UK tax guidance
If you employ anyone and haven’t checked whether you are claiming the Employment Allowance, this is one of the highest-value HMRC reliefs available to small businesses — worth up to £5,000 every year with minimal administrative burden.
The content on Wealthvieu is for informational purposes only and should not be considered financial, tax, or investment advice. Consult a qualified professional before making financial decisions. Full disclaimer · Editorial policy