What is Employment Allowance and what is it actually worth?
Employment Allowance is a reduction of up to £10,500 in the employer National Insurance an eligible business pays across a tax year. It is not a grant, not a cash payment and not a Corporation Tax relief. It works as a running credit against one specific bill: employer secondary Class 1 National Insurance, which is the National Insurance your company pays on wages and salaries on top of what the employee pays.
The amount has been £10,500 since 6 April 2025 and it stays at £10,500 for 2026/27. Before that it sat at £5,000 for three years. The jump was not generous policy on its own: it landed in the same Budget that raised the employer National Insurance rate to 15 percent and cut the secondary threshold from £9,100 to £5,000, so for most employers the allowance softened an increase rather than delivering a windfall.
Here is the arithmetic that makes it real. Employer National Insurance in 2026/27 runs at 15 percent on earnings above the £5,000 secondary threshold. So £10,500 of allowance covers the employer National Insurance on £70,000 of pay above that threshold. Put differently, it wipes out the employer National Insurance on about three and a half full-time employees on the National Living Wage of £12.71 an hour.
One thing it does not touch: Class 1A National Insurance, the charge on benefits in kind such as company cars and private medical cover. That sits outside the allowance entirely. A company with a modest wage bill but a heavy benefits package gets less out of Employment Allowance than the headline number suggests. If you run a limited company and want the wider picture on how salary, dividends and National Insurance fit together, our industry pages set out how we work with owner-managers across sectors, and the mechanics of the pay decision itself sit in our guide to the optimal director's salary for 2026/27.
How does Employment Allowance work inside your payroll?
The allowance is consumed automatically, pay run by pay run, until it is used up or the tax year ends, whichever comes first. There is no lump sum and no separate claim form. Once you switch it on, your payroll software simply stops paying over employer National Insurance to HMRC until £10,500 of liability has been absorbed.
For a small company that means the allowance is often exhausted within the first few months of the tax year. A business with a £60,000 employer National Insurance bill uses the full £10,500 by roughly the end of June and pays normally from July onwards. A business with a £4,000 bill never uses more than £4,000 of it, and the remaining £6,500 simply expires on 5 April. You cannot bank the unused portion, carry it forward or convert it to cash.
That last point catches people out, so it is worth being blunt about it. HMRC will not refund you the difference between your employer National Insurance bill and the full £10,500. The allowance is a ceiling on relief, not an entitlement to £10,500 of money. If your company's employer National Insurance bill for the year is £2,000, the allowance is worth exactly £2,000 to you.
There is one timing wrinkle worth knowing. You can claim at any point in the tax year, but the earlier you claim, the sooner the money stays in your account. Claim in month one and the benefit starts immediately. Claim in month nine and you have already paid over National Insurance that the allowance should have covered, so you then have to ask HMRC either to set the unused allowance against another liability, which can include VAT or Corporation Tax if your PAYE account is clear, or to refund it after the year end. Both work. Both take longer than switching a field on in April.
Why can a one-person limited company not claim Employment Allowance?
A limited company cannot claim Employment Allowance if it has just one director and that director is the only employee paid above the secondary threshold. This is the rule that catches more owner-managed companies than every other exclusion combined, and it has applied since April 2016.
Read the wording carefully, because the trap is in the second half. It is not simply about how many people are on the payroll. HMRC's guidance is explicit that companies with several employees, where the director is the only employee paid above the secondary threshold, are not eligible. You can run a payroll with five people on it and still fail the test if four of them are paid under £5,000 a year.
The rule applies only to limited companies. A sole trader or partnership with employees is not caught by it at all, which is one of the quieter differences between trading structures that rarely makes it into the incorporation conversation. Our comparison of where the sole trader versus limited company maths tips covers the rest of that decision.
What does the rule actually cost? Take the most common owner-managed setup in the UK: a single director paying themselves a salary of £12,570, the personal allowance, with the rest of their income taken as dividends. Employer National Insurance on that salary is 15 percent of the amount above £5,000, so 15 percent of £7,570, which is £1,135.50. A company that could claim the allowance would pay nothing. A single-director company pays all of it.
The official position is set out in HMRC's guidance for single-director companies, updated in May 2026.
How adding a second person unlocks the whole allowance
If a second director or employee is genuinely paid above the secondary threshold, the company becomes eligible for Employment Allowance for the entire tax year. HMRC's guidance names the common cases directly: companies where all the employees are directors and both earn above the threshold, companies employing husband and wife directors where both earn above it, and companies with seasonal workers where at least one employee earns above the threshold in a week.
Now look at what the 2025 threshold change did to this. The secondary threshold used to be £9,100 a year. Since 6 April 2025 it has been £5,000. The same Budget that made employer National Insurance more expensive also made the second-person test far easier to satisfy, because the bar dropped by £4,100. That is the quiet upside almost nobody mentions.
There is a technical distinction here that generic articles miss, and it changes the answer for real companies. Directors are tested against the annual secondary threshold of £5,000, pro-rated if the directorship started part way through the year. Employees are tested against the threshold for their pay period. That works out at roughly £96 a week or £417 a month. So a part-time employee earning £120 a week clears the bar in every week they are paid, while a second director needs to clear £5,000 across the full year.
Work the numbers on the most common fix. A single director on £12,570 pays £1,135.50 of employer National Insurance and cannot claim the allowance. Appoint a spouse who genuinely works in the business as a second director on £6,000, and the company now has two people above the annual threshold. Total employer National Insurance becomes £1,285.50, the allowance covers all of it, and the company pays nothing. The salary is also deductible for Corporation Tax, and if the spouse has no other income the £6,000 sits inside their personal allowance so no income tax or employee National Insurance arises.
Two warnings before anyone reaches for that as a template. The salary has to be for real work at a defensible rate, because HMRC can challenge an arrangement that exists only to unlock a tax advantage. And a director without a written employment contract is not automatically covered by the National Minimum Wage, whereas an employee is, which is why the choice between appointing someone a director and employing them is a decision with consequences beyond this allowance. It is worth ten minutes with an accountant rather than a guess.
The public sector restriction and who it catches
You cannot claim Employment Allowance if you are a public body, or a business doing more than half its work in or for the public sector, unless you are a charity. GOV.UK names local councils and NHS services as the examples, and there are narrow carve-outs for businesses supplying IT, security or cleaning services to public buildings.
For most limited companies this restriction never comes up. For some it is the whole question. Any company whose revenue comes predominantly from local authority or NHS contracts sits directly in scope, and in our experience that includes a good number of care providers, transport operators and support services businesses that have never thought about it.
The awkward part is that "more than half your work" is not defined as sharply as a percentage of turnover, so classification depends on the substance of what the business does and who it does it for. A domiciliary care agency delivering personal care to individuals under a council-funded package is not obviously in the same position as a contractor performing a function of a public nature, and reasonable people read the boundary differently. Our breakdown of what an hour of home care costs to deliver covers where this bites in the care sector specifically.
The practical advice is short. If more than half of your income comes from public bodies, do not let the payroll software default decide this for you. Get the position reasoned and written down before the claim goes in, because a claim made in error is recovered years later with interest, and by then the money has long been spent. The eligibility rule itself is on GOV.UK's Employment Allowance eligibility page.
What happens if you own more than one company?
Only one company in a group of connected companies can claim Employment Allowance in a tax year. Connection usually arises where the same person or group of people controls both companies, so two limited companies owned by the same director are almost always connected for this purpose even if they trade in completely different markets.
The group chooses which company makes the claim, and the choice is worth thirty seconds of thought rather than defaulting to whichever payroll gets run first. Point the allowance at the company with the largest employer National Insurance bill, because that is where the full £10,500 will actually be absorbed. Claiming it in a company with a £3,000 National Insurance bill throws away £7,500 of relief that the sister company could have used.
The same principle applies within a single company running more than one payroll. If you have more than one employer PAYE reference, you can only claim the allowance against one of them. Again, pick the payroll with the biggest bill.
Group structures also interact with Corporation Tax thresholds and a range of other reliefs, and the sensible allocation of Employment Allowance is rarely the only decision on the table. If you run two or more companies, this is worth reviewing once a year alongside the accounts rather than treating as a payroll setting.
Which employees you cannot include in the claim
Two categories of worker are excluded from your Employment Allowance calculation even when the company itself is eligible. Neither is obscure, and both turn up in ordinary small companies.
The first is anyone caught by the off-payroll working rules. Where a contractor's engagement falls inside IR35 and you are making a deemed payment, the employer National Insurance on that deemed payment cannot be set against Employment Allowance. For a company that engages contractors through a personal service company, this can be a meaningful part of the National Insurance bill that the allowance simply does not reach.
The second is anyone employed for personal, household or domestic work, such as a nanny, a cleaner or a gardener working in your home rather than in the business. There is an important exception: care and support workers are not excluded, which is why an individual employing a carer for a family member can claim Employment Allowance in their own right.
Neither exclusion stops the company claiming. They just narrow the pool of National Insurance the allowance can be applied against, which matters when you are working out whether the full £10,500 will actually be used.
Here is how the three common approaches actually compare for getting Employment Allowance right:
| What you need | Payroll software alone | Generic accountant | LOYALS specialist |
|---|---|---|---|
| Tests the single-director rule before switching the claim on | ✗ You tick the box | ● Usually at year end | ✓ Before the first pay run |
| Re-tests eligibility each April when staff change | ✗ | ● If prompted | ✓ Annual review built in |
| Reasons the public sector test and records it | ✗ | ● | ✓ Documented in writing |
| Allocates the allowance across connected companies | ✗ Sees one payroll | ● | ✓ Pointed at the biggest bill |
| Checks whether four years of back claims are open | ✗ | ✗ | ✓ Checked at onboarding |
| Models the second-salary decision properly | ✗ | ● | ✓ With NMW and status advice |
Payroll software will happily let you claim an allowance you are not entitled to, because it asks you to confirm eligibility rather than working it out. That is where most wrong claims begin.
How do you actually claim Employment Allowance?
You claim by putting Yes in the Employment Allowance indicator field in your payroll software and submitting an Employer Payment Summary, usually shortened to EPS, to HMRC. That is the whole mechanism. There is no form, no letter and no application to approve.
If your payroll software has no EPS field, HMRC's free Basic PAYE Tools will do it: select the employer, choose Employment Allowance, confirm the eligibility criteria and send the EPS as normal.
Three practical points follow from how quietly this works:
- You must claim every tax year. The claim does not carry forward automatically in every payroll system, and a claim that silently fails to roll over is one of the most common ways companies lose the allowance without noticing. Put it in the April payroll routine.
- HMRC sends no confirmation. There is no acceptance letter. If the claim is rejected you get an automated message within 5 working days, so silence means it went through. You can see how much of the allowance you have used in your HMRC online account.
- Do not switch the claim off for the wrong reasons. Reaching the £10,500 limit before the year ends does not make you ineligible, and neither does no longer employing anyone. Switching it off mid-year removes the allowance already given for that year and you have to pay the National Insurance back.
That last point deserves emphasis because it is genuinely counterintuitive. If you stop your claim before 5 April, any allowance you have already had that year is withdrawn, not just future relief. The only correct time to switch it off is at the start of a tax year in which you are no longer eligible.
Can you claim Employment Allowance for previous years?
Yes, you can claim for the previous 4 tax years provided the company was eligible in each of those years. From 2026/27 that window covers 2022/23, 2023/24 and 2024/25 at £5,000 each, plus 2025/26 at £10,500, so up to £25,500 can still be recovered.
The conditions were tighter in the earlier years, and you have to test each year on its own terms rather than assuming today's answer applied then:
- For 2024/25 and earlier, your employer Class 1 National Insurance liability in the previous tax year had to be under £100,000. From 2025/26 that cap was removed entirely.
- The single-director rule applied throughout the whole four-year window, so a company that has always been a one-person operation has nothing to reclaim.
- The secondary threshold was £9,100 until 5 April 2025, so a second employee who clears today's £5,000 bar might not have cleared the old one. Test each year against the threshold that applied at the time.
Where a back claim does succeed, HMRC will set the recovered allowance against tax or National Insurance you owe, which can include VAT and Corporation Tax if your PAYE account is already clear, or refund it after the end of the tax year if you owe nothing. It is one of the few genuinely retrospective wins available to a small company, and it is the first thing worth checking when a company changes accountant.
What happens if you claim Employment Allowance wrongly?
HMRC removes the allowance and the company becomes liable for the employer National Insurance it was set against, with interest running from the dates the payments were originally due. Where the error came from carelessness rather than a genuine mistake, a penalty can follow on top.
What makes this risk different from most tax errors is how long it can run undetected. Because HMRC issues no confirmation when a claim is accepted, a company that ticks the box wrongly gets no signal at all. We have seen single-director companies claiming the allowance for several years in a row, entirely in good faith, simply because the box was ticked once when the company had two people on the payroll and nobody revisited it after the second person left.
That is the specific pattern to watch for. HMRC's own guidance covers it directly: if your circumstances change mid-year so the director becomes the only person paid above the threshold, you keep the allowance for that tax year, but you must stop the claim for the following year. The year of the change is fine. The year after is where the exposure begins.
The fix is unglamorous. Review eligibility every April, before the first pay run of the new tax year, and write down the reasoning. Two minutes of documentation converts an assumption into a defensible position, and it is the difference between a five-minute conversation with HMRC and a four-year recovery assessment.
What this means for you: the six checks worth doing this week
Work through these six checks and you will know exactly where your company stands. Most directors find something in the first two.
- Open your last payslip run and find the Employment Allowance indicator. Is it set to Yes or No? A surprising number of directors have never looked, and the answer is often not what they expected.
- Count the people paid above £5,000. Directors are tested against £5,000 for the year. Employees are tested against roughly £96 a week or £417 a month. If the answer is one, and that one is a director, you cannot claim.
- Check the public sector share. If more than half your income comes from councils or the NHS, get the position reasoned and recorded before the next claim.
- List your connected companies. Only one can claim. Confirm the allowance is pointed at the company with the biggest employer National Insurance bill, not just the first payroll you set up.
- Test the four open years. If the company was eligible in 2022/23 through 2025/26 and never claimed, up to £25,500 is sitting there. Test each year against the rules that applied at the time.
- Diarise April. Put a recurring note in the calendar to re-test eligibility and re-make the claim at the start of every tax year. This is the single habit that prevents both a missed allowance and a wrong one.
None of this is complicated. It is a handful of tests applied deliberately once a year instead of a checkbox ticked once and forgotten. The companies that get it wrong are almost never the ones that thought about it and reached a different conclusion. They are the ones that never looked.