If your business employs staff, there is a very good chance you are entitled to the Employment Allowance, and if you are not claiming it, you are leaving real money on the table. From April 2025, the allowance increased from £5,000 to £10,500, making it more valuable than it has ever been. For many small and medium-sized businesses, it could wipe out the employer National Insurance bill entirely.
This article explains who qualifies, how to claim, and how the allowance fits into your broader payroll and tax planning.
What Is the Employment Allowance?
The Employment Allowance is a relief that lets eligible employers reduce their annual employer Class 1 National Insurance Contributions (NICs) bill by up to £10,500. You claim it through your payroll software each tax year, and it is deducted from your liability each time you run payroll until the full £10,500 has been used or the tax year ends, whichever comes first.
It was introduced in 2014 to reduce the cost of employment for smaller businesses and encourage hiring. Since then, the allowance has grown significantly, and the 2025 increase came alongside some of the biggest changes to employer NI in a generation.
What Changed From April 2025?
April 2025 brought two significant employer NI changes that sit alongside each other. Understanding both matters because they work in opposite directions for your business.
The employer NI rate increased from 13.8% to 15%, applying from the point at which employee earnings cross the Secondary Threshold. At the same time, that threshold was lowered from £9,100 per year to £5,000 per year, meaning employers now start paying NI on employee earnings above £5,000 rather than above £9,100.
Together, these two changes mean most employers are paying more in employer NI than they were in 2024/25. The increase in the Employment Allowance to £10,500 was introduced as a partial offset, particularly for smaller employers. Our guide to employer NI rates explains how the calculations work in detail.
The table below summarises the changes from one tax year to the next.
| 2024/25 | 2025/26 | |
|---|---|---|
| Employer NI rate | 13.8% | 15% |
| Secondary Threshold (annual) | £9,100 | £5,000 |
| Employment Allowance | £5,000 | £10,500 |
| Maximum NI bill eligible threshold | Under £100,000 | Under £100,000 |
If you want to model the impact of these rates on your specific payroll, our Employer NI Calculator lets you do that quickly and clearly.
Who Can Claim the Employment Allowance?
You can claim the Employment Allowance if both of the following apply to your business.
- Your employer Class 1 NIC bill was less than £100,000 in the previous tax year
- You are not a sole employee who is also the director of a limited company
The second point is one of the most common sources of confusion. If you run a limited company and you are the only director with no other employees on the payroll, you cannot claim. The allowance is designed to support businesses that employ other people, not to reduce the NI costs of a single director drawing a salary from their own company.
If you add even one other employee, you may become eligible. And if you are already past that point and employing staff, the chances are you should be claiming.
Other situations where you cannot claim include:
- Where more than half of your work is done for a public body (for example, if your business is a personal service company supplying services to a local authority)
- If you are a domestic employer, such as someone employing a nanny or carer in a private home
If you are unsure whether your business qualifies, speaking to accountants Stockport businesses trust for payroll and tax advice is the simplest way to get a definitive answer.
How Much Could You Actually Save?
The maximum saving is £10,500 per tax year. But what does that look like in practice?
If your total employer NI bill for the year is £8,000, the Employment Allowance covers all of it. You pay nothing. If your bill is £15,000, the allowance reduces it to £4,500.
For a business with three or four full-time employees earning average UK wages, it is entirely realistic for the Employment Allowance to cover the whole employer NI liability. The average UK full-time salary is around £35,000. At 15% on earnings above £5,000, that generates employer NI of around £4,500 per employee per year. Three employees would produce a total bill of roughly £13,500, meaning the £10,500 allowance would cover the vast majority of it.
This is also why it is worth reviewing your entire payroll picture alongside the allowance. Our guide to 5 payroll problems small employers can avoid covers some of the most common errors that lead to employers paying more than they should, or inadvertently missing out on reliefs like this one.
You can also use our Take-Home Pay Calculator to understand the full cost of employment for each member of staff, including both employer and employee contributions.
How Do You Actually Claim It?
Claiming is relatively straightforward if you are running payroll correctly. You claim the Employment Allowance through your payroll software by indicating that you are eligible at the start of the tax year. The software then automatically deducts the allowance from your employer NI liability each pay period until the £10,500 is used up.
If you use a professional payroll services Stockport provider, the claim is handled for you as part of the payroll service. But if you manage payroll in-house and have not set up the claim correctly, you could be missing out without realising it.
One thing worth knowing is that you can claim retrospectively for up to four previous tax years if you were eligible but did not claim. That could mean a meaningful refund if the allowance was not being claimed before.
If your records are not in great shape, getting them in order first is essential. Good small business bookkeeping records make it much easier to confirm your previous year’s NI bill and establish whether a back-claim is possible. Our bookkeeping checklists for UK small businesses are a useful starting point if your records need tidying up.
The Employment Allowance and Salary Sacrifice
One area that often gets overlooked is how the Employment Allowance interacts with salary sacrifice arrangements. Salary sacrifice schemes — such as pension contributions, cycle-to-work schemes, and electric vehicle leasing — reduce an employee’s gross salary, which in turn reduces the employer NI liability because you are paying NI on a lower earnings figure.
If you are already claiming the Employment Allowance and you introduce salary sacrifice on top, you could find that your employer NI liability drops below the £10,500 threshold. In that scenario, you might not be using the allowance in full, but the combined saving from salary sacrifice and the allowance together is still very likely to be greater than either one on its own.
This is the kind of interaction that benefits from proper planning. Management accounts for small business can show you in real time what your payroll costs look like month by month and highlight opportunities like this before the year-end figures are done and the chance has passed.
What If You Have Multiple Payroll Schemes?
If you operate more than one PAYE scheme, you can only claim the Employment Allowance against one of them. You choose which one to apply it to, and naturally you want to apply it to the scheme with the largest employer NI liability to make best use of the relief.
If your business has grown to the point where you are running multiple payroll schemes, it is worth reviewing whether your payroll structure is as efficient as it could be. Connected or associated companies are treated as a single employer for the purposes of the £100,000 eligibility threshold, so group structures need to be looked at carefully.
Staying on Top of Employee Costs Throughout the Year
Employment costs do not stay static. As your team grows or pay rates change, your employer NI liability changes too. That means the Employment Allowance, which is a fixed amount, covers a smaller proportion of your total NI bill over time as your headcount increases.
Monitoring this throughout the year rather than only at year-end is one of the things that separates well-run businesses from those that are constantly reacting. If you are using Xero accounting software to manage your finances, your payroll costs are visible in your accounts in real time, which makes it much easier to spot when your employer NI position is changing meaningfully.
Understanding how Xero can make it easier to stay on top of cash flow is relevant here because payroll is often one of the largest cash outflows a business has each month. Knowing exactly what is going out and when is fundamental.
If you are issuing payslips but not tracking employee National Insurance contributions alongside your employer contributions, you are only seeing part of the picture. Both figures matter for cash flow planning.
The Bigger Tax Picture
The Employment Allowance sits within your wider tax position as an employer. Reducing your employer NI bill is helpful, but it needs to be seen alongside your corporation tax requirements, your personal tax position if you take a salary as a director, and the interaction between salary and dividends.
Many owner-managed businesses structure director pay as a combination of low salary and dividends precisely because it reduces employer NI. The Employment Allowance changes that calculation somewhat. If the allowance now covers your employer NI liability in full, the traditional case for keeping the director’s salary at just the NI threshold becomes less clear-cut — because any salary generating up to £10,500 in employer NI incurs no net NI cost to the business anyway.
This is not a reason to change your approach without taking advice, but it is a reason to make sure your accountant has revisited your salary and dividend mix with the new figures in mind.
You can check the current income tax thresholds and bands using our Tax Tables 2025/26, giving you a clear reference for all the key rates in one place. Our UK income tax guide is also worth reading if you want a fuller explanation of how the rates and bands apply.
For directors wondering about the tax treatment of money they take from the business, our guide to directors’ loan accounts is also relevant context here.
What About New Employers?
If you have recently taken on your first member of staff, there is a lot to think about beyond just the Employment Allowance. Our guide to what employers need to know before hiring their first employee covers the practical steps involved in setting up as an employer for the first time.
Understanding the BR tax code is another area new employers often find confusing, particularly when a new employee joins without the right information from their previous employer.
The P60 guide is a useful reference too, covering what each employee’s end-of-year document contains and how it relates to the payroll records you hold as an employer.
Thinking About the Costs of Employment More Broadly
Growing a team is one of the most significant financial commitments a business takes on. Employment costs extend well beyond salaries — you have pension contributions, employer NI, holiday pay, sick pay, and the administrative overhead of running payroll correctly every month.
Understanding how management accounts help directors control business spending is particularly relevant here. When employment costs are rising — whether because you have taken on new people or because NI rates have changed — your management accounts allow you to see that change in context and respond to it promptly.
If poor invoice tracking is affecting your cash flow, it compounds the problem of rising employment costs because you are already working with less cash than you should be. Sorting both issues together is always more effective than tackling them separately.
For businesses considering whether their current structure still makes sense given rising costs, it is also worth looking at the 3 accounting reports every limited company owner should review regularly to keep a clear handle on where costs are going.
Could the Employment Allowance Affect Your Decision to Register as a Sole Trader or Limited Company?
If you are at the stage of choosing your business structure, the Employment Allowance is one of several factors worth understanding. A sole trader employing staff can claim it in exactly the same way a limited company can, as long as they meet the eligibility criteria. Our overview of sole trader advantages is a good starting point if you are weighing up the options.
For those who have recently gone self-employed and are taking on their first members of staff, understanding self-employed National Insurance and how it sits alongside employer obligations is also important. You may well have both Class 4 NIC obligations on your own profits and employer Class 1 NIC obligations on your employees’ wages running at the same time.
If any of this sounds complex, a professional bookkeeping service for small business can help you keep your records in order so that when you do speak to an accountant, the numbers are there and ready to work with.
For Businesses With More Complex Needs
Some businesses are looking beyond the immediate question of UK employment costs entirely. If the cumulative impact of employer NI increases, the Employment Allowance not going far enough, and rising overheads more broadly has you thinking about your long-term structure, it may be worth exploring what Dubai relocation services for UK businesses can offer. Moving or expanding operations to a lower-tax jurisdiction is not the right answer for every business, but it is a legitimate option worth understanding if your current cost base is under sustained pressure.
FAQs: Employment Allowance
Can I claim the Employment Allowance if I am the only employee in my limited company?
No. Single-director companies where the director is the only employee cannot claim. You need at least one other person on the payroll.
Do I need to re-apply for the Employment Allowance each year?
Yes. You need to confirm your eligibility each tax year through your payroll software. It does not carry over automatically from the previous year.
What happens if I forget to claim at the start of the tax year?
You can claim during the year and the allowance will be applied going forward. You can also claim retrospectively for up to four previous tax years if you were eligible but did not claim.
Can charities and community amateur sports clubs claim the Employment Allowance?
Yes. Charities and CASCs can claim even if their NI bill was over £100,000 in the previous year, which means they face a wider eligibility window than commercial businesses.
Is the Employment Allowance taxable income?
No. It is a reduction in your National Insurance liability, not income, so it does not affect your taxable profits directly.
Does the Employment Allowance affect my PAYE payments to HMRC?
Yes. If your employer NI liability each month is lower than the monthly allowance, you deduct the difference from your PAYE payment to HMRC. Your payroll software handles this automatically.
What if my employer NI bill is less than £10,500 for the year?
The allowance simply covers your full bill. You cannot carry any unused amount forward to the next tax year or receive a cash payment for the unused portion.
Make Sure You Are Not Missing Out
The Employment Allowance is one of the most straightforward tax reliefs available to UK employers, but a surprising number of eligible businesses either have not claimed it or are not claiming it correctly.
At U&W Chartered Accountants, we help businesses across Stockport make sure they are using every relief they are entitled to. Whether you need help with payroll, tax planning, or a full review of your accounts, we are here to help.
Find out more on our about page or get in touch directly via our contact page. Ready to get started? You can request a quote for your limited company right now.
