Employment Allowance

Employment Allowance reduces an eligible employer's annual Class 1 secondary (employer) National Insurance bill by up to £10,500 per year from April 2025 (doubled from £5,000). From April 2025 the previous £100,000 employer Class 1 NIC liability cap was removed, employers of any size can now potentially claim. The crucial exclusion is the sole-director trap: a Ltd Co with only ONE director on payroll and no other staff paid above the secondary threshold CANNOT claim. To qualify, the company needs either at least one non-director employee OR at least two directors paid above the £5,000 secondary threshold. Claims are made through payroll software via the Employment Payment Summary (EPS) and can be backdated up to 4 tax years.

Last reviewed: 23 May 2026

Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact HMRC. Read our editorial scope →

What this relief is, in plain English

Employment Allowance is the UK's standing reduction on employer National Insurance for eligible companies, partnerships, sole traders with employees, and charities. From April 2025 it's £10,500 per year, a £5,000 increase from the previous level + a removal of the historical £100,000 employer Class 1 NIC liability cap that had excluded medium-sized employers. The allowance is genuinely substantial: with employer Class 1 NIC at 15% (up from 13.8% in 2025/26) and the secondary threshold at £5,000 (down from £9,100), the gross cost of employing staff has risen, Employment Allowance offsets the first £10,500 of that bill annually. The critical eligibility carve-out is the sole-director trap: a Ltd Co with only ONE director on payroll + no other staff paid above the £5,000 secondary threshold cannot claim. This was originally introduced in 2016 to prevent owner-managed personal service companies + IR35-type structures from accessing what was intended as an employer-of-others relief. Many micro-Ltd-Cos structured as 'me + my spouse on minimal salaries' inadvertently fail eligibility unless both directors are paid above the threshold, or unless they hire at least one non-director employee.

How it works

£10,500 annual reduction on employer Class 1 NIC

Up to £10,500 per year of the employer's Class 1 secondary NIC bill is reduced via the allowance. The current rate increased from £5,000 to £10,500 from April 2025, a doubling of the relief. The allowance applies against the total annual employer Class 1 NIC bill across all employees + directors paid above the £5,000 secondary threshold in 2025/26. If the employer's total annual NIC bill is below £10,500, only the actual NIC due is offset (you don't bank unused allowance).

£100k upper threshold removed from April 2025

Previously, only employers with a previous-year Class 1 NIC liability under £100,000 could claim, a cap that excluded most medium-sized employers from the allowance. From April 2025 this cap was removed entirely; employers of any size can now potentially claim. This is one of the most significant employer-friendly changes in the 2024 Autumn Budget package. Medium-sized businesses that had been ineligible from 2020-2025 due to the cap should re-test eligibility and claim from April 2025.

Sole-director trap, the most common exclusion

A Ltd Co whose only person paid above the £5,000 secondary threshold is a sole director-employee is explicitly excluded. To qualify, the company must have either: (a) at least one non-director employee paid above the secondary threshold, OR (b) at least two directors both paid above the secondary threshold. The threshold for both is the £5,000/year secondary threshold in 2025/26. This rule was specifically designed in 2016 to block owner-managed personal service companies + IR35-type structures from accessing the allowance. Micro-Ltd-Cos commonly fail this test inadvertently because the founder runs the business alone.

Claim mechanics, payroll EPS

Claims are made through payroll software by ticking the Employment Allowance box in your year-start EPS (Employment Payment Summary) sent to HMRC. The reduction applies automatically to each subsequent month's employer NIC payment until the £10,500 is used up. Backdating up to 4 tax years is allowed by submitting an EPS for the historical year, refunds for overpaid NI are processed by HMRC within a few months. Eligibility must be confirmed at the START of each tax year + cannot be added mid-year if missed.

Who qualifies

Employer is a business, public body (not majority public-sector), or charity
Less than half the company's work is in the public sector (>50% private-sector income)
Registered as an employer with HMRC
Has at least one non-director employee paid above the £5,000 secondary threshold, OR at least two directors paid above £5,000 (the sole-director trap)
Has not exceeded the £10,500 allowance in the current year (cannot bank unused amount across years)
Not part of a connected-employer group claiming the same allowance, only ONE company in a connected group can claim

Interactions with other reliefs

Class 1 secondary NIC rate (15% from 2025/26)

Employer Class 1 NIC increased from 13.8% to 15% in 2025/26; secondary threshold dropped from £9,100 to £5,000. The combined impact is a significant increase in employer NIC for most businesses. Employment Allowance at £10,500 partially offsets this, for a small employer with 5 employees on £25,000 each, the gross employer NIC bill is ~£15,000; Employment Allowance reduces this to ~£4,500.

Veterans + Freeport / Investment Zone reliefs

Employment Allowance can be claimed alongside the specific employer NIC reliefs for veterans (12-month zero-rate band) + Freeport / Investment Zone employees (under £25,000 zero-rate band). The reliefs work sequentially: apply the specific reliefs FIRST to the qualifying employees, then Employment Allowance offsets the residual employer NIC.

Care Workers Employment Allowance

The Care Workers Employment Allowance is a SEPARATE relief specifically for care + support workers in the home, also called Employment Allowance but with different mechanics. Standard Employment Allowance + Care Workers EA cannot both be claimed by the same employer in the same year.

IR35 + Off-Payroll Working

Personal service companies subject to IR35 / off-payroll determination are typically excluded from Employment Allowance via the sole-director trap (the contractor is the sole director-employee). Even where multiple directors exist, deemed-employment payments under off-payroll rules don't generate qualifying Class 1 NIC for Employment Allowance purposes.

Common mistakes + audit triggers

Sole-director Ltd Co claiming Employment Allowance with no other staff paid above the secondary threshold (the sole-director trap)
Forgetting to tick the Employment Allowance box on year-start EPS, claim cannot be added mid-year retrospectively for the current year
Claiming Employment Allowance on multiple connected companies in a group, only ONE company in a connected group can claim
Failing to backdate eligible historical years (up to 4 years × £5,000 or £10,500 each could be £30,000+ of recoverable allowance)
Claiming when >50% of work is in the public sector
Setting spouse-director salary just below the £5,000 secondary threshold and assuming this unlocks eligibility (it does NOT, both need to be paid above £5,000)

Worked example

Priya, Birmingham - Ltd Co director running a 4-employee marketing agency (2025/26 + backdated to 2021/22)

Priya runs a Ltd Co marketing agency in Birmingham incorporated in 2021. She's the sole director + employs 3 PAYE staff plus her partner Adaeze (Account Director, also a director). 2025/26 staff structure: Priya (director, £35,000 salary), Adaeze (director, £30,000 salary), 3 employees on £28,000 each. Total annual payroll: £149,000 across 5 people. Priya was previously unaware Employment Allowance had increased to £10,500 and hadn't claimed in 2024/25 either.

Calculation: **Employer Class 1 NIC bill 2025/26:** All 5 employees are paid above the £5,000 secondary threshold. Employer Class 1 NIC at 15% × (each salary - £5,000 secondary threshold). - Priya: 15% × £30,000 = £4,500 - Adaeze: 15% × £25,000 = £3,750 - 3 employees: 15% × £23,000 × 3 = £10,350 - **Total employer NIC: £18,600** **Eligibility test:** Two directors (Priya + Adaeze) both paid above £5,000 secondary threshold → sole-director trap does NOT apply → eligible for full Employment Allowance. Less than 50% public sector work → eligible. **Employment Allowance 2025/26:** £10,500 offsets first £10,500 of NIC. Net employer NIC: £18,600 - £10,500 = **£8,100**. Saving: £10,500. **Backdating claim for 2021/22-2024/25:** Priya was eligible in all 4 years (two directors paid above threshold; private-sector work). Rate per year: 2021/22: £4,000; 2022/23-2024/25: £5,000 each. - Backdated claim total: 4,000 + 5,000 + 5,000 + 5,000 = **£19,000 recoverable** via EPS submissions for each historical year. **Combined value 2025/26 claim + backdating: £29,500 reduction in employer NIC across the 5-year window.** Process: ask payroll provider to file backdated EPS for each year via FPS-EPS reconciliation; HMRC refund process takes 4-12 weeks per year claimed.

Statute reference: National Insurance Contributions Act 2014 + NIC (Reduction in Rates) Act 2023 + Finance Act 2024 NICA 2014 ss.1-9 (Employment Allowance), as amended. HMRC manual: Employment Allowance further guide (gov.uk).

Frequently asked questions

What happens if I miss the Self Assessment deadline?+

The Self Assessment deadline is 31 January (online filing) for the previous tax year. Miss it and HMRC apply an automatic £100 penalty. Beyond that: £10 per day from 3 months late (capped at £900), 5% of tax due at 6 months late, and another 5% at 12 months late, under Schedule 55 of the Taxes Management Act 1970. If you have a genuine reason (serious illness, bereavement, technical issue with HMRC's systems) you can appeal with evidence; HMRC accepts reasonable excuse appeals in most genuine cases.

Do I need an accountant or can I file Self Assessment myself?+

Legally you can file Self Assessment yourself via gov.uk for free, most simple sole-trader returns (single income source, basic expenses) are realistic to self-file. An accountant adds real value when: your trading profit is above £40,000 (extraction-strategy decisions matter), you have multiple income streams (PAYE + self-employment + property + dividends), you've crossed the £90,000 VAT threshold, you're considering incorporation, or you have an HMRC enquiry. Expect to pay £400-£1,500/year for a typical sole-trader accountant; the cost is itself a deductible expense.

How do payments on account work?+

When your Self Assessment tax bill exceeds £1,000 for the first time, HMRC requires payments on account toward NEXT year's tax. Half the current bill is due 31 January (alongside the current bill); the other half is due 31 July. So your first January after crossing the threshold can hit with a double-bill: last year's balance + first payment on account. Adjust via Form SA303 if you expect next year's income to drop substantially. Payments on account don't apply if more than 80% of your tax is collected via PAYE.

I'm the sole director of my Ltd Co with no other employees, can I claim Employment Allowance?+

No, this is the most common Employment Allowance trap for owner-managed Ltd Cos. A company whose ONLY person paid above the £5,000 secondary threshold is a single director-employee is explicitly excluded by anti-avoidance rules (originally introduced in 2016, retained in the 2024 reforms). To get back into eligibility you need either: (a) hire ONE non-director employee paid above £5,000/year (e.g. a spouse paid a genuine salary for genuine work), or (b) appoint a SECOND director also paid above £5,000/year. Both must be a real commercial arrangement, HMRC can challenge artificial salary arrangements made solely to access the allowance. Many sole-director freelancers simply accept the allowance is unavailable + structure extraction around dividends + pension contributions instead.

My company does mostly public-sector work, am I excluded?+

Possibly. The 'public-sector work' restriction excludes employers who do MORE than half their work in the public sector, defined by reference to the body the work is for + whether it qualifies as a public authority for VAT purposes. Pure private-sector contracts are fine. Mixed-economy businesses (e.g. consultancy firms doing some local authority work alongside private clients) need to test the >50% threshold annually based on the source of the company's income. Construction businesses working largely on public-sector capital projects, IT contractors with mainly public-sector clients, and outsourced public services providers are the typical excluded populations. The rule was tightened to prevent off-payroll public-sector workers indirectly receiving the allowance via personal service companies.

Can I backdate Employment Allowance claims for years where my company hadn't claimed?+

Yes, claims can be backdated up to 4 previous tax years. For example, in 2025/26 you can still claim for 2021/22 onwards (4 years back). The rate applied to each backdated year is the rate THAT YEAR (not the current £10,500): £4,000 in 2021/22, £5,000 in 2022/23-2024/25, £10,500 from 2025/26 onwards. Claims are made via your payroll software's EPS (Employment Payment Summary) submission to HMRC, with the relevant tax year specified. Backdated claims that result in a refund of overpaid NI are processed by HMRC within a few months. Many owner-managed companies miss the allowance for a year + then claim 4 years' worth in one go on discovering they were eligible, worth thousands.

If my Ltd Co employs my spouse + we're both directors, what happens?+

Two scenarios. **Both directors paid above the £5,000 secondary threshold:** the company IS eligible for Employment Allowance because the 'two directors paid above secondary threshold' test is met. Claim the full £10,500. **One director above threshold, one below:** the company is NOT eligible, the only person paid above the threshold is a single director. Set both directors' salaries above the secondary threshold (£5,000 in 2025/26) to unlock eligibility, OR ensure at least one non-director employee is paid above. The salary itself must be a genuine commercial reflection of the work done, HMRC's settlement provisions (settlements legislation) can challenge artificial spouse salaries that don't match the work delivered.

Last reviewed: 23 May 2026