What Is Employment Allowance?
Employment Allowance is a reduction in the employer National Insurance bill. For 2026/27 it is worth up to £10,500 a year, and it works by cancelling out your secondary Class 1 National Insurance contributions until the allowance is used up.
It is not a grant, a rebate or a payment. Nothing arrives in your bank account. Each time you run payroll, the employer National Insurance that would have been due is simply not charged, and your monthly payment to HMRC is smaller. When the £10,500 has been absorbed, normal charging resumes for the rest of the tax year.
The relief only touches employer National Insurance. It does nothing for the Income Tax or the employee National Insurance you deduct from your staff, and nothing for Class 1A on benefits reported on a P11D. It is one line of your PAYE bill, not all of it.
Around 1.4 million employers claimed it in 2025/26, which is the highest take up since the allowance was introduced in 2014. Eighty five percent of them have fewer than ten employees.
How Much Is Employment Allowance for 2026/27?
£10,500. The same as 2025/26, and double the £5,000 that applied for the three years to 2024/25.
The history matters when you are looking at old payroll records or making a backdated claim:
| Tax year | Employment Allowance |
|---|---|
| 2026/27 | £10,500 |
| 2025/26 | £10,500 |
| 2024/25 | £5,000 |
| 2023/24 | £5,000 |
| 2022/23 | £5,000 |
Two other things changed on 6 April 2025 alongside the doubling, and both made the allowance easier to get:
- The £100,000 eligibility cap was removed. Before that, any employer with more than £100,000 of secondary Class 1 National Insurance in the previous tax year was locked out entirely. That restriction is gone, so size no longer disqualifies you.
- The de minimis state aid rules stopped applying. Employers used to have to pick a business sector on the claim and confirm they were under a subsidy limit. Those questions have been dropped from the form.
The second change went almost completely unreported, and it is the more interesting of the two. The old state aid caps bit hardest on agriculture, fisheries and road haulage, which had far lower limits than everyone else. Farms and hauliers that were previously capped out of the allowance can now claim the full £10,500 with no sector question at all. If you are in one of those industries and stopped claiming years ago because of the subsidy limit, that reason no longer exists.
The Number That Actually Matters Is £70,000
Every guide quotes £10,500. Almost none of them tell you the point at which it runs out, which is the number you actually need for a budget.
Employer National Insurance for 2026/27 is charged at 15 percent on earnings above the secondary threshold of £5,000 per employee per year. So:
£10,500 ÷ 15% = £70,000
Employment Allowance covers your whole employer National Insurance bill up to £70,000 of aggregate pay above the secondary threshold. Add up, for each member of staff, the amount they earn over £5,000, and if the total is under £70,000, you pay no employer National Insurance at all this year. Cross it and you start paying 15 pence in the pound on everything above.
In total payroll terms, the ceiling is £70,000 plus £5,000 for each person on the payroll:
| Employees | Total gross payroll fully covered |
|---|---|
| 1 | £75,000 |
| 2 | £80,000 |
| 3 | £85,000 |
| 5 | £95,000 |
| 8 | £110,000 |
| 12 | £130,000 |
Those figures assume everyone is paid roughly evenly and worked a full year. They are a planning tool, not a calculation. But if you want one number to hold in your head when you are thinking about a pay rise or an extra hire, it is £70,000 of above threshold pay.
The "Four Full Time Workers" Promise Expired on 1 April 2026
When the allowance was doubled, the line used to sell it was that a small employer could now hire four full time workers on the National Living Wage and pay no employer National Insurance at all. That was true. It is not true any more, and the change happened quietly.
For 2025/26, the National Living Wage was £12.21 an hour. A 35 hour week over 52 weeks is 1,820 hours, so £22,222.20 a year. Employer National Insurance on that is (£22,222.20 − £5,000) × 15% = £2,583.33. Four of them costs £10,333.32, which fits inside £10,500 with £166.68 to spare.
For 2026/27, the National Living Wage rose to £12.71. The same 1,820 hours is now £23,132.20. Employer National Insurance is (£23,132.20 − £5,000) × 15% = £2,719.83. Four of them costs £10,879.32.
That is £379.32 over the allowance. The promise lasted exactly one tax year.
This is the structural problem with Employment Allowance, and it is worth stating plainly: the allowance is a fixed cash amount, the thing it is meant to offset rises every April. The National Living Wage goes up, the secondary threshold has been frozen at £5,000, and £10,500 has not moved. Every year the allowance quietly covers fewer people. On current uprating patterns it will cover three and a half full time minimum wage workers by 2027/28 and three by the end of the decade, without a single announcement, because nothing will have been cut. Fiscal drag applied to a relief works exactly the same way it works on a tax threshold, and it attracts a fraction of the attention.
Did Doubling the Allowance Actually Compensate You?
The doubling was presented as protection for small employers against the April 2025 National Insurance changes. Whether it protected you depends entirely on your headcount, and the crossover point is sharper than most people expect.
Compare the two regimes for one employee earning £E a year:
- 2024/25: 13.8 percent above £9,100
- 2026/27: 15 percent above £5,000
The extra cost per employee is £505.80 plus 1.2 percent of their salary. The extra allowance is £5,500, and it is the same £5,500 whether you employ two people or two hundred. So the number of employees at which the extra allowance is exactly used up is:
| Average salary | Break even headcount |
|---|---|
| £23,000 (full time NLW) | about 7 |
| £30,000 | about 6 |
| £40,000 | about 6 |
| £50,000 | about 5 |
Below those headcounts you came out ahead. Above them you are worse off, and every additional employee makes it worse, because the cost is per head and the compensation is not.
There is a second group nobody counted. An employer with two part timers on £8,000 each paid no employer National Insurance at all in 2024/25, because £8,000 is below the old £9,100 threshold. In 2026/27 the same two people generate £900. That employer went from a nil liability to a real one purely because the threshold dropped to £5,000, and they will only find that out if someone tells them about Employment Allowance.
We think that is the real story behind the take up figures. Claimants jumped 16 percent in 2025/26, from 1.223 million to 1.418 million, an extra 195,000 employers in a single year. The obvious explanation is the removal of the £100,000 cap, but only 4,000 claimants have 250 or more employees, so large businesses cannot account for a jump of that size. The growth came from micro employers, and the reason is the £5,000 secondary threshold pulling thousands of small, low paid payrolls into charge for the first time. They did not start claiming because the allowance got better. They started claiming because they suddenly had a bill.
Who Is Eligible for Employment Allowance?
You can claim if you are a business, a charity, a community amateur sports club, or an individual employing a care or support worker, and you have an employer Class 1 National Insurance liability.
Sole traders and partnerships can claim. This trips people up because Employment Allowance is often written about as a limited company thing. It is not. If you are self employed and you have staff on a PAYE scheme, you have an employer National Insurance bill and the allowance applies to it in exactly the same way. What you cannot do is set it against your own Class 2 or Class 4 National Insurance, because those are not employer contributions.
You cannot claim if:
- You are a limited company with one director and no other employee paid above the secondary threshold. This is the big one, covered in its own section below.
- More than half your work is in the public sector, unless you are a charity. Local authority contractors and NHS suppliers need to look carefully at this test.
- The worker is engaged under the off payroll working rules. Deemed payments to a personal service company do not generate an allowance for the fee payer.
- You employ someone for personal, household or domestic work, such as a nanny, a gardener or a chauffeur. The exception is a care or support worker employed for yourself or a family member, who does qualify.
If you are part of a group of connected companies or charities, only one of them can claim. It is up to you which one, but the decision is made at the start of the tax year and the total across the group is £10,500, not £10,500 each. Connection is not just about shareholdings. HMRC also looks at "substantial commercial interdependence", meaning companies that finance each other, chase the same economic objective, share customers, or share management, employees, premises or equipment. Two companies with the same director, the same office and the same client list are connected for this purpose even if the share registers look separate.
That rule has doubled in value since 2024/25 and almost nobody has revisited it. If you have three companies and the group only claims once, the £5,000 you were leaving on the table is now £10,500. It is worth checking which company is claiming, because it should be the one with the largest employer National Insurance bill, and for a lot of groups that has changed since the payroll was reorganised.
The Single Director Rule, and Why It Now Costs More
A limited company cannot claim Employment Allowance if it has just one director and that director is the only person paid above the secondary threshold. This is the rule that catches the largest number of small companies, and April 2025 made it considerably more expensive.
A sole director on a £12,570 salary generates employer National Insurance of (£12,570 − £5,000) × 15% = £1,135.50 for 2026/27. In 2024/25 the same salary cost (£12,570 − £9,100) × 13.8% = £478.86. The price of being excluded has gone up 137 percent in two years.
The escape route is straightforward: more than one person paid above the secondary threshold at some point in the tax year. That can be a second director or an ordinary employee. HMRC's own guidance confirms the qualifying scenarios, including two directors both paid above the threshold, a husband and wife who are both directors, and a company whose only UK based employee is paid above the threshold in a week.
Here is the part that has changed and that we have not seen made anywhere else. The bar for passing the test fell at exactly the moment the prize doubled. The secondary threshold dropped from £9,100 to £5,000, a 45 percent cut, so the salary a second person needs in order to unlock the allowance fell by more than four thousand pounds. Meanwhile the allowance itself went from £5,000 to £10,500. The test got easier and the reward got bigger in the same Budget.
For a genuine two director company, the ordinary arrangement for 2026/27 looks like this:
| Sole director | Two directors | |
|---|---|---|
| Salary each | £12,570 | £12,570 |
| Employer NI before allowance | £1,135.50 | £2,271.00 |
| Employment Allowance | Not available | £10,500 |
| Employer NI payable | £1,135.50 | £0 |
Two people on £12,570 each pay no Income Tax, because the salary sits at the personal allowance, and no employee National Insurance, because £12,570 is the primary threshold. The company gets a corporation tax deduction on both salaries, and the £2,271 of employer National Insurance disappears into the allowance.
Two conditions on that, and they are not optional. The second person must be genuinely appointed and genuinely doing something, and the pay must be commercially justifiable for the work done. Putting a spouse on the payroll who does no work for the company is not tax planning, it is a deduction HMRC can deny and a claim it can recover with interest. See our guide to directors' remuneration for how salary and dividends fit together.
One useful detail on mid year changes. If a second employee is taken on partway through the year and is paid above the secondary threshold, the company qualifies for the whole of that tax year, not a proportion of it. And if that person then leaves, so you are back to a single director, you can still claim for the year in which it happened, but you should stop the claim for the following year. The test is met by the year, not by the month.
How to Claim Employment Allowance
The claim is made through your payroll, not on a form to HMRC.
- Set the Employment Allowance indicator to "Yes" in your payroll software and submit an Employer Payment Summary (EPS). If you use HMRC's Basic PAYE Tools there is an Employment Allowance option on the home page.
- The allowance then reduces your employer National Insurance automatically each pay run until it is exhausted.
- Do it again next April. The claim does not carry over. It has to be made afresh in each tax year.
That third point is why the relief is missed so often. There is no letter, no reminder and no penalty for not claiming, so a company that changes payroll provider, changes bookkeeper, or simply has a quiet April can stop claiming and nothing at all will happen to alert them. The money just does not come off the bill. Some software carries the flag forward, some does not, and assuming yours does is how a four figure sum goes missing.
If you claim partway through the year, you have not lost anything. The allowance is annual, so it can be set against employer National Insurance already paid earlier in the same tax year. Any resulting overpayment can be used against other PAYE liabilities or reclaimed.
You can also claim for the previous four tax years. In 2026/27 that reaches back to 2022/23, with a separate EPS for each year and the allowance at that year's rate. Do not expect £10,500 four times over. Three of those years are at £5,000, and in any case a claim is only worth the employer National Insurance you actually owed in the year, which was lower before the threshold dropped. For a small payroll a four year catch up is often three or four thousand pounds rather than the thirty odd thousand the headline rates suggest, and it is still worth doing.
Two warnings. If you stop a claim before 5 April, the allowance given for that year is removed and the National Insurance becomes payable, so do not switch it off mid year on a hunch. And if you claim when you were not eligible, HMRC will recover it, with interest, and it will usually surface across several years at once because payroll settings persist.
Employment Allowance and Other Payroll Reliefs
Employment Allowance is separate from every other scheme, and the interactions matter more than they used to.
Small Employers' Relief on statutory payments is tested on your gross Class 1 National Insurance for the previous tax year, before any Employment Allowance is deducted. Claiming the allowance does not push you under the £45,000 threshold and does not affect your recovery rate on statutory maternity pay. They are unrelated tests on the same numbers.
Statutory sick pay has no recovery scheme at all, so the allowance is the only relief in that direction. Since April 2026 SSP is payable from day one with no earnings floor, which raised the cost of short absences for exactly the small employers Employment Allowance is aimed at.
Salary sacrifice reduces employer National Insurance at source. If your bill is already fully covered by the allowance, sacrifice saves the employer nothing, because there was no National Insurance to save. That is a real trap for a small company setting up a scheme on the basis of a generic 15 percent saving.
Veterans, freeport and investment zone reliefs apply a zero secondary rate up to their own thresholds. They come off first, which reduces the liability the allowance then has to cover, so a small employer using one of them may find the allowance stretches much further than expected.
Class 1A National Insurance on benefits in kind is not covered. Employment Allowance only reduces secondary Class 1 on earnings, so the 15 percent on company cars, medical insurance and anything else on a P11D is payable in full.
Our View
Employment Allowance is the most missed relief in small business tax, and the design is the reason. It requires a positive act every April, there is no reminder, no penalty for silence, and no line on any return that shows you failed to claim it. Every other significant relief either happens automatically or has a deadline that generates a letter. This one just quietly does not happen. A single tick box that persisted across tax years would put an estimated eight or nine figures back into small business bank accounts and would cost HMRC nothing to build.
Freezing the allowance while the wage floor rises is a tax rise nobody has to announce. The Treasury said £10,500 would cover four full time minimum wage workers. Fifteen months later it covers three and a half, and the only thing that happened was the National Living Wage going up. If the point of the allowance is to shield small employers from the cost of employing people, it should move with the cost of employing people. Uprating it in line with the National Living Wage would take about ten seconds of parliamentary time and would stop the relief eroding by stealth.
The compensation was calibrated for the smallest employers and quietly abandons everyone else. Doubling a fixed allowance protects you completely at two employees and not at all at fifteen, because the cost it offsets scales with headcount and the allowance does not. Businesses of around seven to ten people took the April 2025 changes almost undiluted, and those are the firms most likely to be at the point where the next hire is a genuine decision rather than a formality. If the policy goal was to protect small employers from a tax on employment, tapering the allowance rather than capping it would have done a much better job.
The single director exclusion has outlived its logic. It was introduced in 2016 to stop personal service companies claiming a relief designed to encourage hiring, which was reasonable. But the threshold it hangs on fell to £5,000, so the exclusion is now trivially avoided by any company willing to appoint a second person, while landing squarely on the genuine one person business that has nobody to appoint. It costs the compliant more than the structured, which is the wrong way round.
Check the connected companies position before you do anything else. The single most common four figure error we see is a group with several companies where the allowance is claimed by the wrong one, or by none of them because everybody assumed somebody else had. That mistake was worth £5,000 a year. It is now worth £10,500, and it repeats every April until someone looks.
How IAK Can Help
Employment Allowance takes about two minutes to claim and is worth up to £10,500 a year, which makes it one of the highest return items in a small company's tax affairs. It is also invisible when it goes wrong.
Our payroll service claims it as part of the annual April setup, checks the eligibility position each year rather than assuming last year's answer still holds, and flags the point in the year at which your allowance is exhausted so the jump in your PAYE bill is not a surprise in month eight. Where a claim has been missed we prepare the backdated EPS submissions for every year still in time.
For owner managed companies we look at the single director test as part of setting salaries in April, alongside dividends, pension contributions and the corporation tax position, because the decision about who is on the payroll and at what level is worth more than four figures and can only be made properly before the year starts. If you run more than one company, we work out which entity should hold the claim.
If you are not certain whether your business is claiming Employment Allowance, the fastest way to find out is to look at your last EPS or ask us to. Contact us for a free consultation. You may also find our guides to National Insurance, PAYE, directors' remuneration, sole trader vs limited company and statutory redundancy pay useful, along with our salary calculator.
Sources
- Employment Allowance: what you'll get, GOV.UK, on the £10,500 maximum and the reduction being applied through payroll rather than paid out.
- Employment Allowance: check if you're eligible, GOV.UK, on the public sector test, the single director restriction, off payroll workers, domestic staff, the care and support worker exception, and the one claim per group of connected companies or charities.
- Rates and thresholds for employers 2026 to 2027, GOV.UK, confirming Employment Allowance of £10,500, the secondary Class 1 rate of 15 percent and the secondary threshold of £5,000 a year.
- Single director companies and Employment Allowance, HMRC further employer guidance, on the qualifying scenarios and the treatment of mid year changes in headcount.
- Employment Allowance: claim for past years, GOV.UK, on the four year backdating window and the allowance amounts for 2022/23 to 2025/26.
- Changes to Employment Allowance, GOV.UK, on the removal of the £100,000 eligibility threshold from 6 April 2025 and employers no longer needing to consider state aid.
- Employment Allowance take up statistics: 2025 to 2026 tax year estimate, HMRC, on 1.418 million claimants, the 16 percent increase from 1.223 million, and the breakdown by employer size and sector.
- NIM06595: companies connected through substantial commercial interdependence, HMRC National Insurance Manual, on the financial, economic and organisational tests for connection.
- National Minimum Wage and National Living Wage rates, GOV.UK, on the National Living Wage of £12.71 an hour from April 2026 and £12.21 for 2025/26.
- SPM182100: Small Employer's Relief annual threshold, HMRC Statutory Payments Manual, on the £45,000 test being measured on gross Class 1 National Insurance before Employment Allowance.