Employment Allowance (EA) is one of the most misunderstood reliefs among small limited companies, especially those run by a single director. Each year, thousands of one-director companies accidentally claim the £10,000 allowance, only to discover later that they were never eligible in the first place. HMRC then asks for the money back, along with possible interest — and it becomes an unnecessary, time-consuming mess.

Here’s what you need to know to stay on the right side of the rules.

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What Is Employment Allowance?

Employment Allowance allows eligible businesses to reduce their annual employer’s National Insurance bill by up to £10,000. It’s designed to help businesses with real employees by reducing the cost of hiring staff.

But that last part — real employees — is where most confusion starts.

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Why Most Single-Director Companies Don’t Qualify

A company is not eligible for Employment Allowance if:

• The only person on the payroll is a director, and
• There are no other employees earning above the Secondary NI threshold.

Many single director companies assume that because they pay employer’s NI on their own salary, they should qualify. Unfortunately, HMRC rules are clear:
A single employee who is also a director does NOT meet the eligibility criteria.

This is the single most common mistake accountants see on payroll submissions every year.

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When a Single Director Company Can Qualify

There is a scenario where a one-director company becomes eligible:
Your company must have at least one other employee earning above the Secondary NI threshold.

This person must:

• Not be a director
• Be on genuine employment terms
• Earn enough to trigger employer’s NIC

Only then does the company meet HMRC’s criteria.

Hiring someone for a few hours on very low pay won’t make the company eligible.

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Why This Mistake Can Cost You

If HMRC finds that your company incorrectly claimed EA:

• The £10,000 must be repaid
• Interest may be charged
• Your payroll records may come under further scrutiny
• Future claims may be reviewed more carefully

This often happens years later, when HMRC runs bulk compliance checks — meaning an unexpected bill arrives long after the mistake was made.

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How to Check If You’re Eligible

You may be eligible if:

• You have more than one employee, and
• At least one non-director earns above the threshold, and
• Your business doesn’t fall into an excluded category (such as certain public services or IR35 workers).

If your company has just the director on payroll, the allowance should not be claimed.

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What to Do If You’ve Been Claiming It Incorrectly

If you’ve been claiming EA but shouldn’t have:

1. Speak to an accountant immediately
2. Amend your earlier Employer Payment Summaries
3. Prepare for HMRC to request repayment
4. Put the correct claim status in place going forward

It’s much better to correct the error early than wait for HMRC to find it.

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Need Help Working Out Your Eligibility?

If you’re unsure whether your company meets the criteria, we can review your payroll and guide you through HMRC rules clearly and correctly.