Employment Allowance 2025/26: Can Your Business Claim £10,500?

What Is the Employment Allowance?

The Employment Allowance is a government relief that allows eligible employers to reduce their annual Employer's Class 1 National Insurance Contributions (NIC) liability. In simple terms, it means you pay less Employer's NIC — potentially saving your business thousands of pounds every year. The allowance was introduced in 2014 and has been increased several times since then, most recently in the Autumn Budget 2024, when it was raised significantly to its current level.

For the 2025/26 tax year (6 April 2025 to 5 April 2026), the Employment Allowance is £10,500. This means eligible employers can reduce their Employer's NIC bill by up to £10,500, and for many small businesses, this effectively eliminates their Employer's NIC liability entirely. Combined with the increase in Employer's NIC rate to 15% and the reduction of the Secondary Threshold to £5,000 (both introduced in the same Budget), the enhanced Employment Allowance is designed to protect smaller employers from bearing the full brunt of these changes.

What Changed for 2025/26?

The Autumn Budget 2024 made three important changes that affect Employer's NIC and the Employment Allowance:

1. Employer's NIC rate increased from 13.8% to 15%: This applies to all employee earnings above the Secondary Threshold and represents a meaningful increase in the cost of employing staff.
2. Secondary Threshold reduced from £9,100 to £5,000: The point at which employers start paying NIC on each employee's earnings has dropped significantly, meaning NIC kicks in on a larger portion of each employee's pay.
3. Employment Allowance increased from £5,000 to £10,500: The previous £100,000 Employer's NIC eligibility threshold has been completely removed, meaning all eligible employers — regardless of the size of their NIC bill — can now claim.

The net effect is that while larger employers face higher NIC costs, many small and medium employers are actually better off thanks to the doubled Employment Allowance and the removal of the eligibility cap. An employer with a total Employer's NIC liability of £10,500 or less will pay no Employer's NIC at all. According to government estimates, the majority of small employers with fewer than four employees will pay no Employer's NIC whatsoever.

Who Qualifies for the Employment Allowance?

Most employers are eligible for the Employment Allowance, but there are some important exceptions. You can claim the Employment Allowance if:

• You are an employer who pays Class 1 NICs on your employees' earnings
• Your Employer's Class 1 NIC liability in the previous tax year was any amount (the £100,000 threshold has been removed for 2025/26 onwards)
• You employ at least one person other than yourself (for single-director companies, see below)

You cannot claim the Employment Allowance if:

• You are the sole employee of your own limited company (a single-director company with no other employees)
• You carry out functions of a public nature (such as local councils, NHS bodies, or government departments) — although charities and community amateur sports clubs are eligible even if they perform some public functions
• You employ someone for personal, household, or domestic work (such as a nanny or gardener) — unless they are employed for the purposes of your business
• You are a service company operating under managed service company legislation

The single-director company exclusion is the one that catches most people out. If you run a limited company and you are the sole director with no other employees, you are not eligible. However, if you employ even one other person — a spouse, a part-time administrator, a Saturday assistant — you become eligible. This is a crucial planning point that our payroll team can advise you on.

How Much Can You Save?

The potential savings are substantial. Let us look at some examples for the 2025/26 tax year:

Example 1: Small employer with 3 employees
Each employee earns £25,000 per year. Employer's NIC per employee: 15% x (£25,000 - £5,000) = £3,000. Total Employer's NIC: £9,000. With the Employment Allowance of £10,500, the employer's NIC bill is reduced to £0. The business saves £9,000.

Example 2: Medium employer with 10 employees
Each employee earns £30,000 per year. Employer's NIC per employee: 15% x (£30,000 - £5,000) = £3,750. Total Employer's NIC: £37,500. With the Employment Allowance of £10,500, the employer's NIC bill is reduced to £27,000. The business saves £10,500.

Example 3: Director plus one part-time employee
Director takes a salary of £12,570. Part-time employee earns £10,000. Director's NIC: 15% x (£12,570 - £5,000) = £1,135.50. Employee's NIC: 15% x (£10,000 - £5,000) = £750. Total NIC: £1,885.50. With the Employment Allowance, the bill is reduced to £0. The business saves £1,885.50.

To see how Employer's NIC affects your specific payroll costs, use our Employer's NIC calculator.

How to Claim the Employment Allowance

Claiming the Employment Allowance is straightforward, but you do need to actively claim it — it is not applied automatically. Here is the process:

1. Through your payroll software: Most modern payroll software (including Xero, QuickBooks, Sage, and BrightPay) allows you to indicate that you wish to claim the Employment Allowance. You simply tick a box or select an option when setting up your payroll for the new tax year. The software then reduces your Employer's NIC payments in your Employer Payment Summary (EPS) filed with HMRC.
2. Timing: You should claim at the start of the tax year (April) when you run your first payroll. The allowance is then applied against your Employer's NIC bill month by month (or week by week, depending on your pay frequency) until the £10,500 is used up. Once it is exhausted, you pay Employer's NIC as normal for the remainder of the year.
3. Annual claim: You must make a new claim each tax year. The claim does not carry over automatically from one year to the next. Forgetting to reclaim is one of the most common mistakes we see.
4. State aid declaration: When claiming, you must confirm that the Employment Allowance does not cause you to exceed the de minimis state aid threshold (approximately £315,000 over a rolling three-year period for most businesses). For the vast majority of small businesses, this is not an issue.

Common Mistakes and How to Avoid Them

Despite the Employment Allowance being relatively straightforward, we regularly see businesses making avoidable errors:

1. Not claiming at all. This is the most expensive mistake. Every year, thousands of eligible businesses fail to claim simply because they do not know the allowance exists or forget to tick the box in their payroll software. If you are eligible and not claiming, you are leaving up to £10,500 on the table.

2. Single-director companies claiming incorrectly. If you are the sole director and employee of your limited company, you are not eligible. Claiming when you are not entitled will result in HMRC clawing back the amount, potentially with interest and penalties. If you want to become eligible, consider employing a family member or hiring a part-time employee.

3. Forgetting to reclaim each year. The Employment Allowance must be claimed afresh each tax year. If you claimed last year but forgot to claim this year, your Employer's NIC payments will be higher than they need to be. Check your payroll software settings at the start of every April.

4. Connected companies not coordinating. If you have multiple companies that are connected (for example, you control more than one company), only one company in the group can claim the Employment Allowance. Connected companies must decide which entity will claim and ensure the others do not also submit a claim. Getting this wrong can result in overclaiming and penalties.

5. Not adjusting for the new thresholds. With the Secondary Threshold dropping to £5,000, some employers who previously had little or no Employer's NIC liability now have a significant bill. If you have not updated your payroll calculations, you may be underpaying NIC, which will catch up with you eventually.

Employment Allowance for Company Directors

The interaction between the Employment Allowance and director's salary planning deserves special attention. As discussed in our dividend vs salary guide, the standard advice for limited company directors is to take a salary of £12,570 (the Personal Allowance level) and extract additional profits as dividends. At this salary level, the Employer's NIC is approximately £1,135.50 per year.

If you are eligible for the Employment Allowance — because you have at least one other employee — this £1,135.50 is completely wiped out by the allowance. In fact, you could take a higher salary and still pay no Employer's NIC, provided your total NIC liability across all employees remains below £10,500.

This opens up planning opportunities. For example, if a higher salary would help with a mortgage application, or if you want to maximise your pension contributions through salary sacrifice, the Employment Allowance can absorb the additional Employer's NIC that would otherwise arise. This is the kind of nuanced planning that a specialist accountant can help you optimise.

Can You Claim Retrospectively?

If you were eligible for the Employment Allowance in previous tax years but did not claim, you may be able to claim retrospectively. You can go back and amend your payroll submissions for previous years, provided you are within the time limits (generally four years). This could result in a significant refund from HMRC.

The process involves submitting an Earlier Year Update (EYU) or amending your Full Payment Submission (FPS) and Employer Payment Summary (EPS) for the relevant periods. This can be complex, and we strongly recommend getting professional help to ensure the amendments are made correctly. Our payroll team has recovered substantial back-dated Employment Allowance claims for clients who were unaware of their eligibility.

Get Expert Help With Your Payroll and NIC Planning

The Employment Allowance is one of many NIC reliefs and payroll planning opportunities available to UK employers. Getting your payroll set up correctly from the start — claiming all available reliefs, setting salary levels optimally, and ensuring compliance with RTI reporting — can save your business thousands of pounds every year.

Our payroll services cover everything from initial setup to monthly processing, year-end returns, and strategic NIC planning. We ensure you claim the Employment Allowance, apply the correct thresholds, and take advantage of every relief available to you. Our fees are competitive and transparent — read our guide on how much an accountant costs in London to understand what to expect.

If you are unsure whether your business is eligible for the Employment Allowance, or if you suspect you may have missed out in previous years, contact us today for a free payroll review. We will assess your situation, identify any underclaims, and ensure your payroll is fully optimised for the 2025/26 tax year and beyond.