If it is eligible, your company may be able to reduce its Employers’ National Insurance Contributions (NICs) bill by up to £10,500 each tax year, thanks to the Employment Allowance.
For small companies with several employees, the allowance can make a significant difference to the cost of running a payroll. However, there are restrictions which mean that not every limited company can claim it.
Here we look at how the EA works, if your limited company is eligible to claim it, and how the allowance is accounted for via the payroll process.
Why was the Employment Allowance introduced?
The Employment Allowance was introduced in April 2014 to reduce the cost of employing people. It reduces the amount of secondary Class NICs an eligible employer has to pay on their employees’ wages.
The allowance has risen substantially since 2014, from £5,000 to £10,500 in April 2025, at the same time as the rate of Employers’ National Insurance increased and the threshold at which employers start paying it was reduced.
A previous restriction that prevented employers with an Employers’ NIC liability of £100,000 or more from claiming the allowance was also removed from April 2025.
How does the Employment Allowance work in practice?
If your company employs anyone (including directors), it must pay Class 1 Employers’ NICs on salaries above the prevailing Secondary Threshold.
For the 2026/27 tax year, the Secondary Threshold is £5,000 per year, and the standard Employers’ NIC rate is 15%.
If you pay an employee £20,000, this would ordinarily create an Employers’ NIC liability of £2,250:
£20,000 salary – £5,000 Secondary Threshold = £15,000
£15,000 × 15% = £2,250
However, if the company qualifies for the Employment Allowance, this NIC liability can be covered by the allowance rather than being paid to HMRC (and reducing the company’s profits).
Importantly, the £10,500 allowance applies to each employer, not to each employee.
For example, if an eligible company incurs £7,000 of qualifying Employers’ NICs during the year, the allowance could cover the entire £7,000.
If its qualifying Employers’ NIC bill reaches £15,000, the first £10,500 could be covered by the Employment Allowance, leaving the company to pay the remaining £4,500.
You can only offset NIC liabilities which have actually arisen. A company with a small payroll and an annual Employers’ NIC bill of £3,000 therefore receives a £3,000 benefit rather than a £10,500 payment from HMRC.
Read more in our guide to salary and dividends.
Are you eligible?
Although most UK businesses can claim the EA, there are several important exclusions that affect small firms, particularly one-man bands.
If you run a limited company where you are the only director and the sole employee, your company cannot claim the Employment Allowance.
However, the position changes if the company has other employees. If your company has more than one employee who is paid above the Secondary Threshold, it may be able to claim the allowance, subject to the other eligibility conditions.
Another restriction that applies to contractors, in particular, is that you can’t use the EA against employers’ NIC arising from earnings of an employee who falls within the off-payroll working rules (IR35).
Furthermore, companies which carry out 50% or more of their work in the public sector are generally unable to claim either, although there are exceptions, including for charities.
For the sake of completeness, it is worth noting that there are also restrictions on some domestic employees. If you employ a nanny, for example, you would not normally be able to claim the allowance in respect of that employment, although different rules apply to care and support workers.
Take a look at the official guide to EA eligibility.
What about husband-and-wife companies?
Many smaller companies are co-owned by spouses who are also both directors.
Unfortunately, this doesn’t mean the company automatically qualifies to use the EA. Eligibility is determined by the level of earnings paid to the spouses.
A company may still be ineligible if one director’s salary exceeds the Secondary Threshold and the other’s falls below it.
This is a classic example of a situation where it is worth talking with your accountant before making any assumptions.
What if your company has several employees?
The Employment Allowance is actually a straightforward tax measure for a small company with several workers.
If you have several employees earning above the current £5,000 threshold, the employers’ NIC liability can build up quickly.
The £10,500 allowance can therefore cover some or, in smaller businesses, all of their NI liability.
The reduction in the Secondary Threshold from £9,100 to £5,000, effective from April 2025, also meant employers had to pay Employers’ NICs at a much lower salary level than before.
As a result, the EA has become more valuable to many small employers even though the underlying Employers’ NIC cost has also increased.
Connected companies
Another restriction to be aware of is if you operate more than a single limited company.
Where companies are considered to be ‘connected’, only one company within the group can claim the Employment Allowance for a particular tax year. You can’t claim a separate allowance for each connected company.
If this applies to your business, you will need to decide which company should make the claim.
Similarly, if an employer operates more than one PAYE payroll, the Employment Allowance can only be claimed against one of them.
Again, if you are in this situation, an accountant’s advice on how to account for the EA is invaluable.
Can you claim the Employment Allowance retrospectively?
If your company was eligible in previous tax years, but for some reason did not claim the Employment Allowance at the time, it may not be too late to make a retrospective claim.
In fact, HMRC allows eligible employers to make claims for the previous four tax years.
However, the rules and maximum allowance have changed several times, so a retrospective claim is based on the rules that applied during the tax year being claimed.
The allowance was £5,000 per year between 2022/23 and 2024/25, then increased to £10,500 from 2025/26.
If you think your company has missed a claim, ask your accountant to check the payroll records and eligibility for the relevant year.
How do you make a claim?
If your company is eligible, you should make the EA claim via your accounting software (or, more likely, your accountant will handle this on your behalf). The claim can be made at any time during each tax year.
You inform HMRC that your company is claiming the EA as part of the Real Time Information (RTI) payroll process. There should be an option to do so within the payroll software, and the claim should be submitted to HMRC via an Employer Payment Summary (EPS).
Once HMRC accepts the claim, the EA is offset against your qualifying Employers’ NIC liability for the tax year in question until either the liability has been covered or the £10,500 annual allowance has been used up.
Need more advice? Get in touch.
The Employment Allowance can make a sizeable difference to the annual NIC bill of eligible businesses. If your accountant runs your payroll, they can check whether you qualify, provide you with advice, and make the claim on your behalf.
If you would like some advice on the EA and how to run your company as tax-efficiently as possible, we’re here to help.
