Employment Allowance — Cutting Your Employer National Insurance Bill (2026)

What the Employment Allowance Is

The Employment Allowance is a relief that lets eligible employers reduce their annual employer (secondary) Class 1 National Insurance contributions by up to £5,000. It is not a cash payment or a rebate — instead, it reduces the amount of employer NIC you have to pay over to HMRC as the tax year progresses, until the £5,000 is used up.

Two points are worth nailing down straight away. First, the allowance applies only to employer (secondary) Class 1 NICs — the National Insurance you pay as the business on your employees' wages. It does not reduce the employee's own National Insurance, and it does not reduce PAYE income tax. Second, the £5,000 figure has changed over the years (it started at £2,000 and was £4,000 before April 2025) and can change again at any Budget, so always check the current amount for the tax year you're in rather than assuming.

Who Can Claim

Most businesses and charities that have employer Class 1 NIC liabilities can claim the Employment Allowance. If you run a trade business — whether you operate as a sole trader with employees, a partnership, or a limited company — and you pay employer National Insurance on your staff's wages, you are generally in scope. You claim the allowance against your employer Class 1 secondary NICs.

There are some exclusions. You cannot claim if more than half of your work is in the public sector (for example, if you do most of your work under public contracts) unless you're a charity. You also cannot claim for staff employed for personal, household or domestic work such as a nanny or gardener — that's a private-household issue rather than a trade one, but worth knowing. For the typical trade firm with one or more employees on the books, none of these usually bite.

The Single-Director Catch — The One That Trips People Up

This is the most important restriction for trade businesses set up as limited companies, and it catches a lot of people out. A limited company cannot claim the Employment Allowance if the only employee paid above the secondary (employer NIC) threshold is a single director.

In plain terms: if you run a one-man limited company — you're the sole director, you're the only person on the payroll being paid above the threshold, and there are no other employees — you are excluded. The classic example is the self-employed-feeling contractor who has incorporated, pays themselves a director's salary, and has nobody else on the books. That company cannot claim.

The position changes the moment you have a second person paid above the secondary threshold. If you take on an employee, an apprentice, or a second director and pay them above the threshold, the company becomes eligible. So a two-person Ltd — a director plus one employee earning over the threshold — can claim, but a one-person director-only Ltd cannot. If you're close to taking your first employee on, this is one more reason it's worth doing: it can unlock up to £5,000 of relief on your employer NIC bill.

The £100,000 Threshold and Connected Companies

Historically there was a cap based on the size of your employer NIC bill: if your total employer (secondary) Class 1 NIC liability was £100,000 or more in the previous tax year, you couldn't claim the allowance at all. That threshold was removed from April 2025, meaning more employers can now claim regardless of their NIC bill — but because eligibility rules shift at Budgets, always confirm the current position for your tax year before relying on it.

The connected-companies rule still matters. If you control more than one company, or your companies are otherwise connected (for example, a holding company and a trading subsidiary, or two firms under common control), the group as a whole is entitled to only one Employment Allowance between all of them — not one per company. You choose which company claims it. This is relevant for trade owners who run, say, a contracting company and a separate property or plant-hire company under the same ownership: only one of them can take the £5,000.

How You Claim — Through Your Payroll

Claiming is genuinely simple, which is part of why so many eligible employers miss it — there's no separate application form to fill in. You claim through your payroll software by submitting an Employer Payment Summary (EPS) to HMRC with the Employment Allowance indicator set to "Yes". Most payroll packages have a single tick-box for this; once you tick it, the EPS tells HMRC you intend to claim.

A few practical points:

• You must claim each tax year — the claim does not roll over automatically. At the start of a new tax year, tick the box again.
• You can claim at any point in the tax year, but claiming early means you start saving from the first month rather than waiting.
• If you forget, you can usually backdate a claim for the current tax year and for the previous four tax years, reclaiming employer NIC you overpaid.
• If your payroll is run by an accountant or bookkeeper, check with them that the box is actually ticked — don't assume.

How the Allowance Gets Used Up

Once you've claimed, the allowance is applied against your employer Class 1 secondary NICs as the year goes on. Each pay period, instead of paying your full employer NIC over to HMRC, you offset it against the remaining allowance until the £5,000 is exhausted.

For a small trade firm, that often means you pay no employer NIC for the first part of the year, then start paying it once the allowance runs out. For example, if your monthly employer NIC bill is around £400, the £5,000 allowance would cover roughly the whole year. If you have several employees and a larger bill, the allowance might be used up within a few months — after which you pay employer NIC as normal for the rest of the year. Either way, it does not reduce the employee's National Insurance or anyone's PAYE income tax — only the employer's secondary NIC.

De Minimis State Aid / Subsidy Rules

For most trade businesses this section won't change anything, but it's worth understanding. In certain sectors, the Employment Allowance counts as a form of subsidy (historically described under "de minimis state aid") and is subject to a cap on the total amount of such subsidy a business can receive over a rolling three-year period. The cap differs by sector — for example, agriculture, fisheries and road freight transport have their own lower limits.

If your business operates in one of those affected sectors, you may need to confirm when you claim that receiving the allowance won't take you over your sector's subsidy limit, and you should keep a record of other subsidies you've received. The vast majority of building, maintenance and general trade firms are not in a capped sector and don't need to worry about this — but if you do any agricultural, fishing or haulage work alongside your trade, it's worth a quick check with your accountant.

A Straightforward Saving Many Trade Employers Miss

The Employment Allowance is about as close to free money as the tax system gets for a small employer. It's up to £5,000 a year off your employer National Insurance bill, the claim is a single tick-box in your payroll software, and you can backdate missed claims for up to four previous tax years. Yet plenty of trade firms with staff have never claimed it — either because nobody told them, because they assumed their one-person Ltd was eligible when it wasn't, or because they assumed it was and never actually ticked the box.

If you employ anyone above the secondary threshold and you're not a director-only single-employee company, check your payroll today. If the allowance isn't being claimed, you're very likely leaving money on the table — and you may be able to reclaim some of what you've overpaid.

Quick Reference: Can You Claim the Employment Allowance?

Thresholds, the £5,000 allowance and eligibility rules change at Budgets. Always confirm the current figures and rules with HMRC or your accountant for the relevant tax year before relying on them. This article is general guidance, not tax advice.