Employment Allowance for Care Providers: The Public Sector Work Test When Most Income Is Council-Funded

The short answer: can a care provider claim Employment Allowance?

You can claim Employment Allowance as a care provider only if 50 percent or less of your work is in or for the public sector. Cross that line, so that most of your income, hours or staff sit on council and NHS or ICB contracts, and HMRC treats you as carrying out functions of a public nature, which bars the claim unless you are a registered charity. That single test is the difference between keeping up to £10,500 of employer National Insurance and handing it to HMRC.

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 just 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.

The complication is the exclusion that most care owners never read. The rule that blocks a claim is not about your size or your legal form, it is about who your work is for. HMRC's further guidance on eligibility, updated in May 2026, says a business carrying out functions wholly or mainly of a public nature cannot claim, and it defines "wholly or mainly" as more than 50 percent of your work. Council-commissioned and NHS-funded care is exactly the kind of work that test was written to catch.

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 the 50 percent test below comes from live payroll work, not a summary of the manual. We come back to the grey area, the exceptions and the fix, because the honest answer for a lot of providers is "it depends, and here is exactly on what".

What the allowance is actually worth to a care business in 2026/27

For 2026/27 the allowance is worth up to £10,500 off your employer secondary Class 1 National Insurance, and for a labour-heavy care provider that is roughly the NIC on the first £70,000 of wages above the threshold. 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 about £70,000 of pay, which for most agencies is two to three full-time carers' worth.

Put it against a real wage bill. Your carers earn at or above the National Living Wage of £12.71 an hour from 6 April 2026, and once you cross the £5,000-per-head threshold you pay 15 percent employer NIC on everything above it. An agency running 40 carers can easily face a five-figure annual employer NIC bill, so the difference between claiming and not claiming £10,500 is not rounding. It is real money that either stays in the business or does not.

Two limits are worth knowing before you get excited. 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 size no longer stops you claiming. What stops a care provider claiming is almost never size. It is the public sector test.

The public sector work test, and why council funding is the problem

The reason council funding matters is that HMRC treats care commissioned by a local authority or the NHS as work of a public nature, and doing more than half of that kind of work makes you a public authority for Employment Allowance purposes. Public authorities cannot claim unless they are charities. So a care provider whose income is mostly council-funded is, in HMRC's eyes, mostly doing the state's work, and the allowance falls away.

HMRC's own examples in the National Insurance Manual at NIM06530 and the further guidance make the boundary concrete. A GP surgery where NHS patients are 90 percent of the work has no entitlement, because the majority of what it does is of a public nature. A council-owned arm's length body that manages the council's housing stock cannot claim either. On the other side, a security firm that guards prisoners for 25 percent of its work and serves private clients for the other 75 percent can claim, because the public-nature share is under half. Care sits in the same logic: the more of your rota is filled by council and NHS or ICB packages, the closer you are to being treated as a public authority.

What HMRC does not publish is a worked example that says "domiciliary care agency" in as many words, and that is where providers get caught out. Some owners assume that because they run a private company, invoice the council and take a commercial margin, they are plainly a private business and can claim. Others assume that any council money at all bars them. Both are wrong. The test is not whether public money touches your bank account, it is whether more than half of your work is in or for the public sector. A CQC-registered agency that is 70 percent council-funded is very likely caught; the same agency at 40 percent council and 60 percent private self-funders is very likely fine.

This also means the answer can change as your business changes. Win a large new council block and your public-nature share can tip past 50 percent mid-year, taking your entitlement with it. Grow your private self-funder book and it can tip back. Employment Allowance is not decided once when you incorporate; it is a live position that moves with your funder mix, which is one more reason the split between council and private income is worth watching. Our guide to local authority versus private fees for domiciliary care looks at how that same mix changes your cash flow and tax alongside the allowance.

How to measure your 50 percent, and pick the fairest way

You measure the public-nature share the way that most fairly reflects your business, and HMRC allows three methods: the number of employees doing public-sector work, the percentage of time spent on it, or the turnover derived from it. The further guidance sets out all three, and it does not force you to use the one that gives the worst answer. For a care provider sitting near the line, testing all three and keeping the working is the difference between a defensible claim and a guess.

The three measures can genuinely disagree. Take an agency where council packages are lower-rate but high-volume and the private clients pay a premium hourly rate. Measured by turnover, private work might be 55 percent because the rates are higher, which would let you claim. Measured by carer hours, council work might be 60 percent because the volume is greater, which would not. Neither is wrong, but you have to choose the measure that best represents the business and be able to explain why. Turnover is often the cleanest for a care agency because it maps to the invoicing you already produce, but it is not automatically the right one.

Here is the eligibility test as a single decision, following the boundary HMRC actually applies.

One practical warning on the flowchart's first box. A one-person limited company, where the sole director is the only employee paid above the secondary threshold, cannot claim Employment Allowance at all, whatever its funder mix. That rarely bites a real care agency because you have carers on the payroll, but it does catch the occasional owner-managed care consultancy or a dormant-style structure, so it is worth ruling out first.

Charities, CICs and direct-payment employers

Three situations override the ordinary public sector test, and only one of them is a reliable escape route. A registered charity can claim Employment Allowance even if it is wholly or mainly doing public-nature care work, so a charitable care provider funded mostly by councils still keeps the allowance, subject to the connected-charity rules. That exception is written into the guidance and rests on the charity definition in the Small Charitable Donations Act 2012, so your status has to be genuine registered charity status, not a loose description.

A community interest company is the trap. Many care providers set up as a CIC because it signals social purpose and reassures commissioners, and owners often assume a CIC is treated like a charity. It is not. A CIC is a company, and unless it also holds charitable status it faces exactly the same 50 percent public work test as any other limited company. If your CIC is mostly council-funded, the charity exception does not save you, and a payroll that has been claiming on the strength of the "CIC equals charity" assumption is claiming in error. We check this the moment a CIC care client comes on board.

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. That is a household employing one worker, not an agency, so it does not change the position for a provider business. It is worth knowing only so you do not confuse the individual direct-payment employer with the agency being paid from council budgets: the two are treated quite differently.

If you run more than one care entity, the connected-companies rule also bites. 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 OpCo and a separate property or staffing company cannot claim £10,500 in each; it is one allowance shared. Getting the eligible entity and the group structure right is part of what a specialist looks at, and it is closely tied to the way you handle payroll across a larger carer team.

What happens if you claimed it wrongly, or missed it

Both mistakes cost money, in opposite directions. If you claimed Employment Allowance while you were not eligible, HMRC can recover the allowance you wrongly received, add interest on the underpaid employer NIC, and, where it judges the error careless rather than innocent, charge a penalty on top. If you were eligible but never claimed, you have simply paid more employer NIC than you needed to, and you can usually go back and claim for up to the four earlier tax years to recover it.

The wrongly-claimed side is the one that keeps care owners up at night, and rightly so, because the sums compound. Claim £10,500 a year for four years on a payroll that should never have claimed and you are looking at £42,000 of allowance to unwind, before any interest or penalty. Employer NIC is reported in real time through your RTI payroll submissions, so a review that samples your funder mix against the years you claimed is not hard for HMRC to run, and a compliance check that finds it is a far worse conversation than a voluntary correction. Where the position is genuinely borderline, the honest approach is to document which measure you used and why, not to claim quietly and hope.

The missed side is more common than you would think, and it is pure lost money. A privately-funded care agency, or a mostly-private one that is comfortably under the 50 percent line, is entitled to the full £10,500 and yet plenty never tick the Employment Allowance indicator in their payroll software. That is £10,500 a year left with HMRC for no reason. The good news is it is recoverable: you can claim the current year and go back up to four years, which for an eligible provider that has never claimed can be a five-figure refund of employer NIC.

The size of that refund comes straight from the rate history. Reaching back four years from 2026/27 covers 2022/23, 2023/24 and 2024/25 at £5,000 each, plus 2025/26 at £10,500. Add them together and it is £25,500 of employer National Insurance a wrongly excluded care provider can still recover, on top of the current year's £10,500 going forward.

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 repeats every month until someone catches it.

1. Work out your public-nature share. Take the last twelve months and split your income, hours and staff between council or NHS or ICB work and private self-funders. If public work is comfortably under half on every measure, you can claim. If it is over half, you cannot, unless you are a registered charity.
2. Confirm your legal status, honestly. Registered charity means you can claim regardless. A limited company or an ordinary CIC does not, so do not lean on the charity exception unless you actually hold charitable status.
3. 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.
4. Review the years you already claimed. If you have been claiming while mostly council-funded, get the earlier years looked at and corrected on your terms, not HMRC's. If you were eligible and never claimed, go back up to four years and recover the overpaid employer NIC.

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. That is the gap LOYALS fills for London care providers: we run the payroll, we check the funder mix against the 50 percent rule every time it moves, and we keep the working so that if HMRC ever asks, the answer is already documented. If you want that handled rather than hoped, a short call is the fastest way to know exactly where your agency or home stands.