If you’re a business owner, managing your National Insurance contributions might not be at the top of your to-do list, but it can make a real difference to your bottom line. This is where Employment Allowance comes in helping small businesses reduce their NI contributions, leaving more cash to reinvest in growing your company.
In this article, you’ll get to know:
- Who Qualifies For Employment Allowance
- When To Claim And How To Go About It
- What Happens After Your Claim Is Made
- How To Stop Claiming If It’s No Longer Needed
- And Much More!
Let’s get started!
What is the Employment Allowance?
The Employment Allowance is a government scheme that allows eligible employers to reduce the amount of National Insurance (NI) contributions they need to pay. It’s a way to give businesses some relief on their tax bills, helping to make employment more affordable. This allowance can be a game-changer, especially for small businesses or those starting up.
What is Employers National Insurance?
Employers National Insurance (NI) is a tax that businesses have to pay on behalf of their employees. It’s a key part of the UK’s social security system and helps fund things like pensions, the NHS, and other public services. As an employer, you’ll need to pay NI on the earnings of each employee who earns above a certain threshold.
But why is this important when talking about Employment Allowance?
Well, Employment Allowance helps businesses reduce the amount they pay in Employers National Insurance contributions. If you qualify, it can cut up to £10,000 off what you owe. So, instead of paying the full amount for your employees’ National Insurance, you could pay less, which is a big help, especially for small businesses.
For example, if your business pays a lot of National Insurance each year because you have several employees, Employment Allowance could give you a nice break by lowering your contributions.
In short, Employers National Insurance is a necessary cost for businesses, but Employment Allowance offers some relief, making it easier for small employers to manage their finances. If you qualify, make sure you claim it—it’s like a discount on a necessary expense!
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Who Can Claim Employment Allowance?
Not everyone can claim the Employment Allowance. To make sure you qualify, you need to meet certain conditions.
1. Small and Medium Businesses
If you run a small or medium-sized business and pay Class 1 National Insurance contributions for your employees, you may be eligible for the allowance. This includes businesses in various sectors—whether you run a high street shop, an online business, or a local service.
2. Employers with Employees on Payroll
To qualify, you must be paying employees who are on your payroll. The Employment Allowance is designed to support businesses that are actively employing people, not those just operating on their own.
3. Specific Business Types that Can Claim
- Sole Traders: If you’re a sole trader employing people, you can claim the allowance.
- Limited Companies: Businesses that are registered as limited companies are also eligible.
- Partnerships: If you run a partnership with employees, you can claim too.
Who Cannot Claim Employment Allowance?
While the allowance is available to many employers, there are certain exceptions.
1. Public Sector Employers
Public sector employers, such as government bodies or charities, generally cannot claim the Employment Allowance. This includes schools, local authorities, and hospitals. The government made this decision to ensure that the allowance is used to support businesses that drive economic growth and innovation.
2. Employers with Over £100,000 of NI Contributions
If your business pays over £100,000 in National Insurance contributions annually, you won’t be eligible to claim the Employment Allowance. This threshold ensures that the allowance is given to those businesses who need it most.
3. Directors of Companies with No Other Employees
If you’re a director of a limited company but don’t have any other employees, you won’t qualify. This is because the Employment Allowance is meant to benefit businesses with multiple employees, not those run solely by one person.
4. Employers Who’ve Already Used the Full Allowance
You can only claim up to a certain amount per year (currently £5,000 per tax year). If you’ve already claimed this amount, you won’t be able to claim again until the next tax year.
Employment Allowance 2025/26 Eligibility
For the 2025/26 tax year, companies with more than one employee can claim up to £10,500 if the company is paying secondary class 1 NICs on the earnings of its employees. This applies even if one of the employees is a director, provided at least one of the employees’ earnings exceed the secondary threshold.
How to Claim Employment Allowance?
Claiming the Employment Allowance is pretty simple and you can do it online through HMRC. Whether you’re using your own payroll software or HMRC’s Basic PAYE Tools, the process is straightforward. Let’s break it down:
If You Use Your Own Software
If you’re using your own payroll software, here’s what you need to do:
- Find the Employment Payment Summary (EPS): Inside your payroll software, look for the section where you can submit the EPS. This is where you’ll claim the allowance.
- Tick ‘Yes’ for Employment Allowance: There will be an option to indicate whether you’re claiming the Employment Allowance. Just tick ‘Yes’ in the Employment Allowance section.
- Send the EPS: Once you’ve selected ‘Yes,’ submit the EPS through your payroll software just like you would normally do with your regular payroll submission.
If your payroll software doesn’t support submitting an EPS, there’s no need to worry. You can always use HMRC’s Basic PAYE Tools to claim the Employment Allowance.
If You Use HMRC’s Basic PAYE Tools
If you’re using HMRC’s Basic PAYE Tools, here’s what you need to do:
- Choose Your Employer: Open HMRC’s Basic PAYE Tools and pick the right employer from the list.
- Go to Employment Allowance: Find the section called ‘Employment Allowance’ in the menu and click on it.
- Check Your Eligibility: Make sure your business qualifies for the allowance. You’ll need to confirm that your company meets the criteria.
- Submit Your EPS: Once you’re all set, submit your EPS, and you’re done. The allowance will be applied, and you can save on your National Insurance contributions.
If you’re claiming for a previous tax year, follow the same steps. Just make sure to indicate whether or not the de minimis state aid rules apply to your business.
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When to Claim Employment Allowance?
You can claim Employment Allowance at any time during the tax year. But to make things easier, it’s best to apply as soon as possible after the start of your financial year so you can begin benefiting from the reduction in your National Insurance payments immediately.
What Happens After You’ve Made a Claim?
Once you’ve made your claim, HMRC will review it, and if all checks out, your future NI contributions will be reduced. The benefit will usually show up on your next payroll. In most cases, the process is smooth, and the savings will be applied straight away.
When Will the Claim Be Processed?
Claims are processed quickly, usually within a few weeks. However, it can depend on the specifics of your business and your PAYE system. In most cases, you’ll see the benefit in your next payroll run.
How Much Can You Claim?
You can claim up to £10,500 for the 2025–2026 tax year which can be used to offset your National Insurance costs. This is a significant amount for small businesses, especially those operating on tight budgets.
How Does Employment Allowance Affect Your Business?
- Reduces National Insurance Contributions: Employment Allowance helps lower the amount you pay for your employees’ National Insurance, reducing overall costs for your business.
- Improves Cash Flow: The savings from Employment Allowance free up cash, which you can reinvest back into your business for growth, operations, or even hiring more staff.
- Makes Hiring More Affordable: By lowering your NI contributions, Employment Allowance makes it more affordable to employ staff, which can be crucial for small businesses and startups.
- Offers Financial Relief: The allowance provides businesses with a financial cushion, especially during tight financial times, helping you maintain stability.
- Saves You Money: You can claim up to £10,500 for the 2025–2026 tax year, a significant amount that can ease your tax burden.
- Easy to Claim: The process to claim Employment Allowance is straightforward and can be done through your HMRC PAYE system, saving time and hassle.
- Supports Business Growth: With reduced tax liabilities, you have more resources available to scale your operations, improve your services, or invest in new opportunities.
Claiming Employment Allowance for Past Tax Years
If you missed claiming Employment Allowance in a previous tax year, you can still apply. However, there’s a time limit. You can only claim for the last four years, so make sure you check your past tax records and claim any missed allowances before the deadline.
How to Stop Claiming Employment Allowance
If your business no longer meets the criteria for the allowance, or if you no longer need the relief, you can stop claiming at any time. Simply log into your HMRC portal and uncheck the box for Employment Allowance. It’s that easy.
What is an Employment Payment Summary?
An Employment Payment Summary (EPS) is a report that you send to HMRC, detailing your PAYE details, including any adjustments, such as claims for Employment Allowance. It’s important for keeping your records accurate and up-to-date.
Do I Only Need to Tell HMRC Once?
Once you’ve claimed the Employment Allowance, you only need to inform HMRC once, unless there’s a change in your eligibility. If there’s a change, you should update HMRC right away. If you stop being eligible or if you’re no longer claiming, let them know.
Can I Claim Employment Allowance with One Employee?
The Employment Allowance is not available to single-director companies where the only employee is the director. A company must incur additional secondary class 1 NICs liabilities on employment earnings paid to at least one other employee to qualify for the Employment Allowance. If the company only pays secondary NICs on the director’s earnings, it will not be eligible.
Employment Allowance for Single Director Company
For single-director companies where the director is the sole employee, the company cannot claim the Employment Allowance. The exclusion under subsection 4A means that only businesses with more than one employee can claim the allowance, even if an additional director is involved.
Can Two Directors Claim Employment Allowance?
A company with two or more directors can only claim the Employment Allowance if both directors have earnings above the secondary threshold for paying employers’ secondary class 1 NICs. If only one director earns above this threshold, the company will not qualify for the allowance.
Employment Allowance Eligibility for Two Directors
For a limited company with two directors, the company is eligible to claim the Employment Allowance only if more than one director’s earnings exceed the secondary threshold for employers’ secondary class 1 NICs. If only one director’s earnings are above the threshold, the company cannot claim the allowance.
Director-Only Payroll and Employment Allowance
If a company has only a director on the payroll, it is not eligible to claim the Employment Allowance, even if the director’s earnings exceed the secondary threshold. The company must have additional employees whose earnings contribute to the company’s secondary class 1 NICs to qualify for the allowance.
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Bottom Line
Employment Allowance is an amazing opportunity for eligible businesses to save on National Insurance payments. By reducing this cost, you’ll have more cash available to reinvest into your business and grow. Make sure you check your eligibility, apply early in the tax year, and keep up with your claims. If you’ve missed out in the past, it’s not too late to get what you’re owed.
Disclaimer: All the information provided in this article on second-hand van qualifies for AIA, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.