What is the Employment Allowance?
The Employment Allowance is an annual tax relief that allows eligible UK employers to reduce their employer Class 1 National Insurance contributions (NICs) liability. For the 2025/26 tax year, the allowance is £10,500, meaning eligible employers can save up to £10,500 on their employer NI bill.
It was introduced in April 2014 at £2,000 and has been progressively increased. The £10,500 rate applies from April 2025.
Eligibility
To claim the Employment Allowance, you must:
- Be an employer paying employer Class 1 NICs on employees' earnings
- Have had an employer NI liability below £100,000 in the previous tax year
- Not be a single-director company with no other employees
- Not be a public body, charity, or organisation performing more than 50% public functions (some exceptions apply)
- Not be claiming through connected companies (only one company in a group can claim)
Connected Companies and Charities
If you control more than one company, the connected companies rules apply. Only one company in the group can claim the Employment Allowance.
De Minimis State Aid
From April 2020, the Employment Allowance is classified as de minimis state aid under UK subsidy control rules. Employers must declare that claiming will not exceed the de minimis threshold for their sector.
How to Claim
The Employment Allowance is claimed through your payroll software, not through a separate HMRC form:
- In your payroll software, indicate that you are claiming Employment Allowance for the tax year
- The software sets the EPS indicator (Employer Payment Summary) to notify HMRC
- Offset against your PAYE bill: The allowance reduces the employer NICs due each pay period until the £10,500 is used up
- No lump-sum payment: HMRC does not pay you the allowance. It simply reduces what you owe
When to Claim
- Claim at the start of each tax year (you must claim afresh each year)
- You can claim part-way through the year if you realise you are eligible
- Claims can be back-dated to the start of the current tax year
Worked Example
A small company employs 8 people. Their total employer Class 1 NICs for 2025/26 would be £14,000 without the allowance.
- Without Employment Allowance: £14,000 employer NICs for the year
- With Employment Allowance: £14,000 - £10,500 = £3,500 employer NICs for the year
- Saving: £10,500
If total employer NICs would be less than £10,500, the employer pays no employer NICs at all (but the unused portion does not carry forward).
Impact by Business Size
| Annual Employer NICs | With EA | Effective Saving |
|---|---|---|
| £5,000 | £0 | £5,000 |
| £10,500 | £0 | £10,500 |
| £15,000 | £4,500 | £10,500 |
| £50,000 | £39,500 | £10,500 |
| £100,000+ (previous year) | Not eligible | £0 |
Common Mistakes
- Forgetting to claim each year: You must re-claim at the start of each tax year. It does not roll over automatically.
- Claiming through multiple connected companies: Only one company in a connected group can claim. HMRC can recover the allowance with penalties if multiple companies claim.
- Single-director companies claiming: If you are the sole director with no other employees, you are not eligible, even if you pay yourself through PAYE.
- Not checking the £100,000 threshold: If your previous year's employer NICs exceeded £100,000, you cannot claim regardless of your current year liability.
How Grove HR Helps
Grove HR's payroll preparation module flags Employment Allowance eligibility based on your company profile, tracks cumulative employer NICs against the £10,500 threshold, and integrates with payroll software to ensure the claim is made correctly each tax year.
Frequently Asked Questions
Can I claim Employment Allowance if I only have one employee?
Yes, as long as you are not a single-director company with no other employees. If you have one employee (even part-time), you can claim. The exclusion is specifically for companies where the sole director is the only person on the payroll.
Does the Employment Allowance carry forward if I do not use it all?
No. The £10,500 allowance applies to a single tax year. Any unused amount does not carry forward to the next year. You must claim again each April and use the full amount against that year's employer NICs.
Can charities claim the Employment Allowance?
Most charities are eligible for the Employment Allowance. The exclusion applies to public bodies and organisations carrying out more than 50% of their work as functions of a public nature. A charity that does not perform public functions can claim.