Employment Allowance

Employment Allowance is a government relief that was introduced in 2014 to reduce the cost of employment for smaller businesses. It works by offsetting up to a maximum amount each tax year against the employer Class 1 NICs that you owe HMRC through the PAYE system. From 6 April 2025, the maximum Employment Allowance is £10,500 per tax year — an increase from £5,000 in 2025/26, announced at the 2024 Autumn Budget alongside the rise in employer NIC rates.

The allowance is not a cash payment. Instead, it reduces your employer NIC liability as the year progresses. Each time you run payroll and employer NICs become due, you apply the remaining allowance until it is used up or the tax year ends. If your total employer NIC bill for the year is less than £10,500, you simply pay nothing — the allowance covers the full bill. You cannot carry unused allowance into the next tax year.

Employment Allowance is available in England, Scotland, Wales, and Northern Ireland. It applies to employer Class 1 NICs only — it cannot offset employee NICs, income tax, or other employer costs. It is separate from the employer NIC secondary threshold, which determines the earnings level above which employer NICs become payable.

To claim Employment Allowance, your employer Class 1 NIC bill must have been under £100,000 in the previous tax year. This threshold was introduced in 2020 to focus the relief on smaller employers. If you are a new employer with no NIC history, you can still claim if you reasonably expect your bill to be under £100,000 in the current year.

The following cannot claim Employment Allowance:

• Companies where the sole director is the only employee (or the only person paid earnings above the secondary threshold). This rule prevents one-person limited companies from claiming what is intended to be an employment incentive for businesses with actual employees.
• Public bodies — employment businesses that supply staff to public bodies, and employers that are themselves public authorities (such as NHS trusts, councils, and government departments).
• Employers whose NIC bill was £100,000 or more in the previous tax year.
• Employers using the domestic employer NIC category only (e.g., employing nannies or care workers at home through Category B or Category C letters).

Charities and community amateur sports clubs (CASCs) can claim Employment Allowance. Businesses in a connected company group — broadly, companies under common control or ownership — can only claim one Employment Allowance between them, not one per company. The group must decide which company will claim the allowance.

You claim Employment Allowance through your payroll software by submitting an Employer Payment Summary (EPS) to HMRC. You do not need to write to HMRC or complete a separate form. The process is:

• In your payroll software, locate the Employment Allowance indicator or option and confirm that you are eligible to claim
• Submit an EPS to HMRC indicating that you are claiming Employment Allowance — this should be done at the start of the tax year (or as soon as you determine you are eligible)
• The allowance is then applied automatically as employer NICs accrue through the year — your payroll software deducts it from the NIC payments due

You must re-confirm your claim at the start of each new tax year. Even if you claimed last year and remain eligible, you need to resubmit the EPS indicator for the new year. If you forget to claim Employment Allowance at the start of the year but were eligible, you can claim retrospectively within the same tax year by submitting an EPS with the Employment Allowance indicator.

Claims can also be backdated by up to four tax years if you were eligible but did not claim. To claim for a previous year, submit an EPS with the relevant year's indicator, or in some cases you may need to contact HMRC directly. Any backdated allowance will be credited against your current or future NIC liability, not paid as a cash refund — though if you have no current NIC liability, a refund may be possible.

The connected companies rule prevents business owners from claiming multiple Employment Allowances by operating through several related companies. Two companies are connected if one controls the other, or both are controlled by the same person or persons. Control in this context means owning more than 50% of the shares or being entitled to more than 50% of the assets on a winding up.

Where two or more connected companies each employ staff and pay employer NICs, they must nominate only one company to claim the Employment Allowance for the group. The other companies must not claim it. There is no restriction on which company in the group can be the nominated claimant, but in practice it makes sense to nominate the company with the highest employer NIC bill, so that the full allowance is used.

If you operate a group of connected companies and each has been claiming Employment Allowance separately, this needs to be corrected. You should amend the EPS submissions for the non-nominated companies to remove the Employment Allowance claim, and HMRC may require repayment of incorrectly claimed allowances. Seek advice from a payroll specialist if you are unsure which of your related companies counts as connected.

Note that partnerships and LLPs can also claim Employment Allowance, subject to the same eligibility rules. For a mixed partnership including a company partner, the treatment can be complex — specialist advice is recommended.