Employment Allowance: Can Your Company Reduce Its NI Bill?

Employment Allowance can significantly reduce the cost of employing staff for many UK businesses. For the 2026/27 tax year, Employment Allowance allows an eligible employer to reduce its secondary Class 1 National Insurance liability by up to £10,500. With the standard employer National Insurance rate at 15% and the annual Secondary Threshold at £5,000, Employment Allowance can be particularly valuable for small and growing businesses.

Employment Allowance is not automatic merely because a company has a PAYE scheme. The employer must satisfy the eligibility conditions, check the exclusions and make a valid payroll claim. These rules are especially important for owner-managed businesses, single-director companies and connected groups.

This guide explains who can claim, how much can be saved, the director and connected-company rules, and the main mistakes to avoid.

What is Employment Allowance?

Employment Allowance is a relief that reduces an eligible employer’s secondary Class 1 National Insurance bill. Instead of being paid as a separate grant, Employment Allowance is generally set against employer National Insurance arising through payroll.

After a valid claim is made, Employment Allowance reduces the amount of qualifying employer National Insurance payable to HMRC until the available allowance has been fully used or the tax year ends. For 2026/27, the maximum Employment Allowance is £10,500.

If a company has £6,000 of qualifying employer National Insurance for the year, Employment Allowance could reduce that liability to nil. The unused £4,500 does not become a separate cash payment. If another company has £16,000 of qualifying employer National Insurance, the allowance could reduce the bill by £10,500, leaving £5,500 payable.

Employment Allowance therefore provides the greatest practical benefit where a business has enough qualifying secondary Class 1 National Insurance to use all or most of the available amount. However, the relief can still be worthwhile where the annual liability is below £10,500 because it can potentially remove that liability completely.

It is also important to understand what the allowance does not cover. Employment Allowance is aimed at secondary Class 1 National Insurance paid by employers. It is not a reduction in employee National Insurance deducted from wages, and it is not a general credit against corporation tax, VAT or every type of payroll charge.

Why employer National Insurance matters

Employer National Insurance is an additional employment cost paid by the business. It is separate from the National Insurance deducted from an employee’s salary.

For 2026/27, the standard employer rate is 15% on earnings above the relevant Secondary Threshold, which is £5,000 a year for the standard threshold.

Consider an employee earning £30,000 where the normal category A rules apply. Ignoring any special zero-rate categories, £25,000 of the salary is above the £5,000 Secondary Threshold. At 15%, the employer National Insurance cost is £3,750.

If the business has several employees, that cost increases quickly. Employment Allowance can therefore make a noticeable difference to the total payroll budget. A business with three employees on similar salaries could build a significant employer National Insurance liability, and the allowance may offset a large proportion of it.

Salary is only one part of the cost of employing somebody. Employers may also need to consider pension contributions, holiday pay, statutory payments, benefits and other staffing costs. Employment Allowance cannot remove all of those costs, but the relief can reduce one of the major payroll charges faced by employers.

Employment Allowance in 2026/27

Employment Allowance is worth up to £10,500 for the 2026/27 tax year. The allowance was increased from £5,000 to £10,500 from April 2025, making Employment Allowance considerably more valuable than it was under the previous rules.

Another important change from April 2025 was the removal of the previous £100,000 employer National Insurance eligibility restriction. Before that change, employers with secondary Class 1 National Insurance liabilities above the relevant prior-year limit could be prevented from claiming. That restriction no longer applies to current-year Employment Allowance claims.

This means some employers that were previously too large to claim Employment Allowance may now qualify, provided the other conditions are met. Businesses should therefore avoid relying on older online guidance that still refers to the £100,000 restriction.

Employment Allowance should be considered as part of annual payroll budgeting. If a company expects to recruit staff, increase salaries or expand its payroll, the amount of employer National Insurance may rise. The allowance can help reduce that increase and improve cash flow, but eligibility should always be checked before the saving is included in forecasts.

Who can normally claim?

Many businesses that employ staff can potentially claim the relief. A limited company with employees may qualify, while a sole trader or partnership with employees can also potentially benefit. Charities, including qualifying community amateur sports clubs, may also be eligible.

The relief is therefore not restricted to companies. The key question is whether the employer has qualifying secondary Class 1 National Insurance liabilities and whether an exclusion prevents the claim.

It can be particularly useful to small employers because it may cover most or all of their annual employer National Insurance. The removal of the old £100,000 restriction also means larger employers may now qualify.

Businesses carrying out public-sector work need to review the rules carefully. HMRC’s current guidance refers to businesses or public bodies doing less than half of their work in the public sector, while separate restrictions can apply where activities wholly or mainly involve functions of a public nature. Employment Allowance eligibility in this area can depend on the nature of the work rather than simply who pays the invoice.

Employment Allowance may also be available to someone employing a care or support worker. This is an important exception because ordinary personal, household or domestic employees are generally excluded.

The single-director company rule

A major restriction applies to single-director limited companies.

A company cannot claim Employment Allowance if it has only one director and that director is the only employee whose earnings create a secondary Class 1 National Insurance liability. This rule commonly affects personal companies where the director takes a salary but has no other employees earning above the relevant employer threshold.

For example, suppose a company has one director and no other employees. The director’s salary produces employer National Insurance. Even though a qualifying liability exists, Employment Allowance will generally not be available because the sole director is the only employee giving rise to that liability.

The same issue can arise where the company has another employee on payroll but that employee is paid below the level at which secondary Class 1 National Insurance becomes due. Employment Allowance does not become available merely because a second person has been added to payroll.

The position can change during the year. HMRC guidance confirms that where a single-director company later employs an additional person whose earnings create secondary Class 1 National Insurance, the company may become eligible for Employment Allowance in that tax year.

Employment Allowance should therefore be reconsidered when staffing changes. A genuine new employee may alter the company’s position, although nobody should be added to payroll artificially simply to obtain the relief.

A company with two directors is not automatically caught by the single-director exclusion. If both directors are employees whose pay produces qualifying secondary Class 1 liabilities, Employment Allowance may be available, subject to the other conditions.

Connected companies

Owners operating more than one company should pay close attention to the connected-company rules.

If two or more companies are connected at the start of the tax year, only one company in the connected group can qualify for the allowance for that tax year. The companies must decide which one will make the claim.

Employment Allowance cannot normally be multiplied across several connected companies simply because each company has a different PAYE reference. This prevents a group under common control from claiming a separate £10,500 Employment Allowance in every connected company.

Companies can be connected where one company controls another or where the same person or people control both. HMRC guidance explains that control may arise where a person holds more than 50% of the share capital or voting rights. Other detailed rules can also apply.

In some situations involving associated persons, HMRC also considers whether businesses are financially, economically and organisationally interdependent. Common management, employees, premises, customers or financial support can therefore be relevant when deciding whether companies are connected.

Within a group, the chosen claimant should usually be an eligible company with enough qualifying employer National Insurance to use the relief efficiently. The legal connection between the companies must be checked before the claim is made.

Workers and liabilities that may be excluded

Not every person on payroll can be included when considering the relief.

HMRC states that certain employees cannot be included, including workers whose earnings fall within the off-payroll working rules. Employment Allowance therefore cannot be used to reduce employer National Insurance arising on excluded deemed payments under the off-payroll framework.

Personal, household and domestic employees are also generally excluded. Examples include a nanny or gardener. However, an exception can apply where the person is employed as a care or support worker.

The relief should therefore be calculated by reference to qualifying secondary Class 1 National Insurance, not simply the total amount shown across every payroll category.

This distinction matters for businesses using contractors, intermediaries or unusual employment arrangements. Employment Allowance can be valuable, but the relief does not override the underlying rules that determine whether a particular liability qualifies.

How much could your company save?

The potential saving depends on the amount of qualifying employer National Insurance generated during the tax year.

Suppose Company A qualifies and has £4,000 of eligible secondary Class 1 National Insurance. Employment Allowance could reduce the £4,000 liability to nil. The remaining £6,500 of Employment Allowance would not be paid to the company as cash.

Suppose Company B has £10,500 of eligible employer National Insurance. Employment Allowance could potentially eliminate the entire £10,500 liability.

Suppose Company C has £18,000 of eligible employer National Insurance. Employment Allowance could reduce the bill by £10,500, leaving £7,500 payable.

The allowance can therefore be especially powerful for smaller payrolls where the annual qualifying liability is below or close to the maximum amount. For larger payrolls, Employment Allowance still provides a fixed reduction of up to £10,500.

Because the relief is used through payroll, Employment Allowance can also improve cash flow during the year rather than only producing a benefit after year end.

Businesses should nevertheless forecast the relief conservatively. If eligibility changes or the payroll includes excluded liabilities, the actual amount available may differ from an initial estimate.

How to claim Employment Allowance

Employment Allowance is normally claimed through payroll software by sending an Employer Payment Summary, known as an EPS, to HMRC.

Where compatible software is used, the employer selects “Yes” in the Employment Allowance indicator field on the EPS. Employers using HMRC’s Basic PAYE Tools can also make the claim through that system.

Before submitting Employment Allowance, the employer should check that it satisfies the eligibility rules. Payroll software can transmit the claim, but eligibility remains the responsibility of the employer.

Once the claim is accepted, Employment Allowance is set against eligible secondary Class 1 National Insurance as liabilities arise. The business should then reconcile payroll reports to the HMRC PAYE account to make sure the allowance is being applied correctly.

Employment Allowance does not have to be claimed on the first payroll of the tax year. An eligible business can claim after the tax year has started. This can be useful if the business discovers later that it qualifies or if its circumstances change.

A single-director company, for example, may be ineligible at the start of the year but later become eligible after taking on an additional employee whose pay creates employer National Insurance. Employment Allowance can then be considered based on the updated circumstances.

Common mistakes to avoid

One common mistake is assuming every company with employer National Insurance can claim Employment Allowance. A single-director company can be excluded where the director is the only employee creating secondary Class 1 National Insurance.

Another mistake is claiming Employment Allowance in several connected companies. Where companies are connected at the start of the tax year, only one company can generally claim the relief.

A third mistake is relying on outdated information. The maximum Employment Allowance increased to £10,500 from April 2025 and the old £100,000 eligibility restriction was removed. A business using older guidance may incorrectly decide that it does not qualify.

Employers can also make the opposite mistake by treating the allowance as a general PAYE credit. Employment Allowance is intended to reduce qualifying secondary Class 1 National Insurance, so the payroll must be reviewed carefully.

Another risk is failing to revisit Employment Allowance when circumstances change. A new employee, a company acquisition, a new connected company or a change in public-sector activities may alter the position.

Regular payroll reviews help ensure that the relief is claimed when available but stopped where the business genuinely ceases to qualify.

Payroll planning and record keeping

Employment Allowance should form part of wider payroll planning.

A business deciding whether to recruit, change directors’ salaries or reorganise a group should consider employer National Insurance alongside income tax, employee National Insurance, pension duties, National Minimum Wage and commercial staffing costs. Employment Allowance can reduce the overall employer burden, but the allowance should not drive artificial employment arrangements.

Good records should explain why the employer believed it qualified. This may include payroll reports, details of employees and directors, connected-company information and calculations showing how much Employment Allowance was used.

Where several companies share ownership or management, the records should show why one company was selected to claim the relief. This helps demonstrate that the connected-company restriction was considered.

Employment Allowance should also be reviewed at year end. Comparing the amount claimed with qualifying secondary Class 1 National Insurance can identify errors before accounts and tax computations are finalised.

Final thoughts

Employment Allowance can reduce an eligible employer’s National Insurance bill by up to £10,500 in 2026/27. With the standard employer National Insurance rate at 15% and the annual Secondary Threshold at £5,000, Employment Allowance can create a substantial saving for businesses with staff.

The relief is especially valuable for small employers, but Employment Allowance is not automatic. Single-director companies, connected businesses, employers carrying out certain public functions and businesses with excluded workers may need additional checks before claiming the relief.

The best approach is to review eligibility at the start of each tax year and whenever the workforce or group structure changes. Employers should calculate expected secondary Class 1 National Insurance, check directors and employees, consider connected companies and claim only when the conditions are satisfied.

Used correctly, the relief can improve cash flow, reduce employment costs and help a business avoid paying more employer National Insurance than necessary.

For many employers, Employment Allowance is a straightforward way to reduce payroll costs, but the real value comes from checking eligibility properly before making a claim. As employer National Insurance remains a significant cost for businesses, reviewing the relief alongside salary levels, staffing plans and wider payroll obligations can help companies make more informed decisions and manage employment costs more effectively.

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