The short answer: can a council-funded care agency claim it?
Usually yes. A care agency can normally claim Employment Allowance even when councils or the NHS fund most of the work, because the exclusion is written for public authorities, and a care provider delivering personal care to people is not one. HMRC judges "public authority" by the nature of what you do, not by where your money comes from, and that distinction is the whole story for the care sector.
Employment Allowance itself is simple. It is a relief that reduces the employer secondary Class 1 National Insurance an employer pays on staff wages, up to a cap of £10,500 for the 2026/27 tax year, confirmed in the government's Employment Allowance eligibility guidance. It is not a grant and not cash back; it stops the meter on your employer NIC until the £10,500 is used up. For a care business, where wages are the biggest line on the profit and loss, that is a meaningful sum to be leaving on the table.
The confusion comes from a myth that has done real damage in the care sector: the belief that if councils fund most of your income you automatically count as a public authority and cannot claim. That is not what the rules say. HMRC's National Insurance Manual at NIM06530 is explicit that whether your work is publicly funded "can be indicative of functions of a public nature, but funding alone is not a deciding factor". A domiciliary agency providing care to individuals is providing a service to those people, whoever pays the invoice.
This guide is written by LOYALS, a King's Cross firm of chartered accountants that runs payroll and employer NIC compliance for London home care agencies and care homes, so the way we apply this test below comes from live payroll work, not a summary of the manual. We have put claims in for care clients who had been told for years they were not eligible, and recovered several years of overpaid National Insurance in the process, so the rest of this article is about being sure of your position, not talking yourself out of it.
What the allowance is worth in 2026/27, and four years back
For 2026/27 the allowance is worth up to £10,500 off your employer secondary Class 1 National Insurance, and if you have never claimed while eligible you can usually recover up to another £25,500 for the four earlier years. Employer NIC is charged at 15 percent on earnings above the secondary threshold of £5,000 a year, a rate and threshold that took effect from 6 April 2025 and continue to apply in 2026/27. Because £10,500 divided by 15 percent is £70,000, the allowance covers the employer NIC on roughly £70,000 of pay above the threshold, which for most agencies is two to three full-time carers' worth.
The back-claim is the part care owners tend to miss. Employment Allowance is not automatic; you have to claim it, and if you were entitled but never did, you can go back up to the four previous tax years. Across 2022/23 to 2025/26 the allowance was £5,000, £5,000, £5,000 and £10,500, which adds up to £25,500 of overpaid employer NIC that an eligible provider can reclaim, on top of the current year. For an agency that has run payroll for years on the mistaken belief it could not claim, that is a genuine five-figure refund sitting there unclaimed.
Two limits are worth knowing. First, the allowance only offsets employer secondary Class 1 NIC; it does nothing for the tax, the pension contributions or the employee's own National Insurance. Second, since 6 April 2025 the old £100,000 secondary-NIC cap that used to exclude larger employers has been removed, so the size of your wage bill no longer stops you claiming. For a care provider, size was never the issue anyway. The only real question is the public sector test, and that is where the money is won or lost.
The public sector test: why funding is not the deciding factor
The test is about the nature of your work, not who funds it. You are a public authority, and so barred from the allowance, only if your activities are wholly or mainly, meaning 50 percent or more, the performance of functions of a public nature. HMRC's NIM06530 sets out the indicators of that: whether you act on behalf of, or take the place of, government or a public authority; whether you have or exercise statutory powers; and whether your activities could be subject to judicial review.
Sit a domiciliary care agency against those indicators and it does not fit. You are not standing in for the council when you send a carer to help someone wash, dress and take their medication; you are delivering a service to that individual under a contract the council happens to pay for. You do not exercise statutory powers. Your care visits are not the sort of thing a judicial review challenges. The council commissioning and funding the care is buying a service, not delegating a public function to you, which is exactly why HMRC says funding is only an indicator.
The examples in HMRC's further guidance on eligibility make the line clear. HMRC lists NHS services, a GP practice that is mainly NHS work, a council's meals on wheels, prison services including private firms guarding prisoners for the government, refuse collection for a council, and an arm's length body managing the council's own housing stock as functions of a public nature. On the other side, it lists security and cleaning for a public building, IT supplied to a government department, and independent pharmacies dispensing NHS prescriptions as work that is not of a public nature, even though public money is involved. A care agency delivering personal care to individuals belongs firmly on the second list.
This is why a CQC-registered home care provider that is 80 percent council-funded is very likely entitled to the allowance, and why the "over half your income is council money, so you cannot claim" rule of thumb is simply wrong for the sector. Where you should pause is if part of your organisation genuinely does perform a public function, or if your legal form is a public body, which we come to next. The council and private split still matters enormously for your cash flow and margin, as our guide to local authority versus private fees for domiciliary care explains, but it is not what decides Employment Allowance.
When a care provider genuinely cannot claim
Three situations do stop a care provider claiming, and none of them is simply being council-funded. Rule those out and, for most agencies and homes, the allowance is yours. The decision below walks the actual test in order.
Take the three real bars in turn. The first is the single-director company. A limited company where the sole director is the only employee paid above the £5,000 secondary threshold cannot claim Employment Allowance at all, whatever its funder mix, a rule that has applied since April 2016. That rarely bites a working care agency because you have carers on the payroll above the threshold, but it does catch an owner-managed care consultancy or a brand-new company before it takes on staff.
The second is being a genuine public body, or the rare case where your organisation really does perform a function of a public nature. An arm's length body set up by a council to run a service on the council's behalf is caught; an ordinary independent provider delivering commissioned care is not. If your structure or your activities put you close to that line, get it reasoned and written down rather than guessed. The third bar is the connected-companies rule: where the same people control two or more companies, only one Employment Allowance is available across the whole group, and you choose which PAYE scheme claims it. A care group with an operating company and a separate property or staffing company gets one allowance, not one per entity, which matters for how you structure a growing group and run its payroll across a larger carer team.
Charities, CICs and direct-payment employers
Three special cases sit around the edges of the rule, and knowing them stops you either missing a claim or leaning on the wrong reason for it. A registered charity can claim Employment Allowance even if it is wholly or mainly doing public-nature work, so a charitable care provider keeps the allowance regardless, subject to the connected-charity rules and the charity definition in the Small Charitable Donations Act 2012. If your care organisation is a genuine registered charity, you are covered whichever way the public function question falls.
A community interest company is the one people misread. Owners often set up a CIC to signal social purpose and assume it is treated like a charity for tax. It is not: a CIC is a company, and it does not get the charity route into Employment Allowance. The good news is that it usually does not need it. A CIC delivering personal care passes the ordinary nature-of-work test just like any other independent provider, because its care is not a public function, so a council-funded CIC care agency can generally claim on exactly the same basis as a limited company. Check your legal status so you claim for the right reason, but do not assume a CIC is barred.
The third case is different in kind. Where an individual employs their own carer or personal assistant directly, funded by a local authority direct payment or a personal health budget, HMRC operates a specific care and support employer scheme, and those individual employers can claim Employment Allowance against the employer NIC on their carer's pay whether the funding is public or private. That is a household employing one worker, not a provider business, so it does not change the position for an agency; it is worth knowing only so you do not confuse the individual direct-payment employer with the agency being paid from council budgets. If your structure is at all unusual, our care agency accountants can confirm which basis applies to you.
How to claim it, and how to reclaim what you missed
You claim Employment Allowance through your payroll, and reclaiming missed years is a separate, straightforward adjustment. For the current year you simply set the Employment Allowance indicator to yes in your payroll software, which flags it on your RTI Employer Payment Summary to HMRC, and the allowance then offsets your employer secondary Class 1 NIC as the year runs until the £10,500 is used up. There is no separate application form and no wait for approval; it runs inside the pay process you already operate.
For past years, if you were eligible and never claimed, you can go back up to the four earlier tax years and recover the overpaid employer National Insurance. Because the allowance was £5,000 in 2022/23, 2023/24 and 2024/25 and £10,500 in 2025/26, a care provider that never claimed can recover up to £25,500 across those years. The mechanism is an amended submission for each year, and the refund is either set against what you owe or repaid, so it is genuinely money back rather than a paper credit.
The one discipline that matters is documenting why you are eligible, especially if your history includes being told you were not. Note that your work is the delivery of personal care to individuals, not a public function, and keep the reasoning on file so that if HMRC ever queries the switch from not claiming to claiming, the answer is already written down. Where a provider genuinely is close to the public-function line, the honest approach is to reason it and record it, not to claim blind. This is the kind of care-specific judgement a general payroll bureau or an off-the-shelf software setting will not make for you, which is the practical difference set out below.
Here is how the three common ways of handling the Employment Allowance question actually compare for a care provider:
| What deciding Employment Allowance needs | DIY / payroll software | Generic accountant | LOYALS care specialist |
|---|---|---|---|
| Knows council funding alone does not bar a care claim | ✗ A blind tick box | ● Often repeats the myth | ✓ Applies the nature-of-work test |
| Documents why your care work is not a public function | ✗ | ● If you ask | ✓ Reasoned and kept on file |
| Knows the charity claims and a CIC still usually qualifies | ✗ | ● Often assumes CIC is barred | ✓ Legal status checked |
| Spots and recovers a back-claim of up to £25,500 | ✗ | ● Current year only | ✓ Four earlier years reviewed |
| Applies the one-allowance rule across a connected care group | ✗ | ● If flagged | ✓ Group structure reviewed |
| Open Mon to Sat when a payroll or funding question lands | ✗ | ✗ Mon to Fri 9 to 5 | ✓ 10am to 7pm Mon to Sat |
This is why care providers who have been wrongly told they cannot claim tend to move to a specialist who tests the real position and recovers the missed years.
What this typically costs at LOYALS
- Care Payroll and Compliance (up to 25 carers, employer NIC and Employment Allowance handled): £995/month
- Care Finance Department (up to 50 carers, payroll, council and private invoicing and compliance): £1,495/month
- Payroll and NMW compliance review, including checking and back-claiming Employment Allowance: £595 one-off
All fees exclude VAT and are fixed for twelve months. Quotes are issued in writing within 24 hours after a 15-minute call, and we do not take on ongoing work below £500 a month. See full price list.
What to do before your next payroll run
The whole thing comes down to four checks, and none of them takes long once you have the numbers to hand. Do them before the next pay run rather than at year end, because Employment Allowance is claimed live through payroll, and a wrong setting, in either direction, repeats every month until someone catches it.
- Confirm your work is not a public function. If you deliver personal care to individuals, you almost certainly pass, whatever share of your income is council or NHS funded. Only pause if part of your organisation genuinely performs a public function or you are a public body.
- Rule out the single-director trap. If your company's only employee paid above £5,000 is the sole director, you cannot claim until a second person is paid above the threshold. For a staffed care agency this is rarely a problem.
- Check the group. If you control more than one care entity, make sure only one is claiming the single allowance, and that it is claimed against the right PAYE scheme.
- Look back four years. If you were eligible and never claimed, recover the overpaid employer NIC, up to £25,500 across 2022/23 to 2025/26, on top of switching this year's claim on.
None of this is exotic, but it is exactly the kind of care-specific detail a general payroll bureau or an off-the-shelf software setting will not test for you, and the cost of getting it wrong is either a wrong claim or, far more often in this sector, years of quietly overpaid National Insurance. That is the gap LOYALS fills for London care providers: we run the payroll, we reason and record your Employment Allowance position, and we chase down the back-claim if there is one. If you want that handled rather than hoped, a short call is the fastest way to know exactly where your agency or home stands.