Sarah Bradford outlines changes to the employment allowance for 2025/26 and explains how to claim.
Alongside the October 2024 Budget announcement of National Insurance contributions (NICs) hikes for employers from 6 April 2025, there was a nugget of good news – the employment allowance was also increased from the same date.
This is particularly helpful for the employers at the smaller end of the scale who are eligible to claim the allowance, as despite the increase in the secondary rate and the fall in the secondary threshold; they find that they actually pay less in secondary Class 1 NICs in 2025/26 than in 2024/25.
Secondary Class 1 NICs rates and thresholds
For 2025/26, the rate of secondary Class 1 NICs payable by employers is set at 15%, up from 13.8% for 2024/25. To compound matters, the secondary threshold is reduced to £96 per week (£417 per month; £5,000 a year) for 2025/26 from £175 per week (£758 per month; £9,100) for 2024/25. This will mean that employers will pay secondary contributions at a higher rate on more of an employee’s earnings.
There is no change to the upper secondary thresholds for under 21s, apprentices under 25 and veterans in the first year of their first civilian employment, which remain at £967 per week (£4,189 per month; £50,270 per year). Where an employer has physical premises in a special tax site (such as a freeport or an investment zone), the secondary threshold applying to the earnings of a new employee in their first three years of employment in the special tax site remains at £481 per week (£2,083 per month; £25,000 per year).
Employment allowance
The employment allowance enables eligible employers to reduce the amount of the secondary Class 1 NICs they pay over to HMRC.
To partly offset the impact of the employer NICs increases applying from 6 April 2025, the employment allowance has risen to £10,500 (up from £5,000 for 2024/25). Where the employer’s secondary Class 1 NICs liability for the year is less than the allowance, the allowance is capped at the amount of the liability. For example, for 2025/26, if an employer had a secondary Class 1 NICs liability of £9,000, their employment allowance would be capped at £9,000 and would fully offset their liability for the year, so that they have nothing to pay to HMRC.
Not all employers are eligible for the allowance, the main exclusion being personal companies where the sole employee is also a director. However, at the other end of the scale, for 2025/26 larger employers whose secondary Class 1 NICs bill in 2024/25 was £100,000 or more can claim the allowance – previously, it was restricted to employers with a secondary Class 1 NICs bill in the previous tax year of less than £100,000. Where an employer operates more than one payroll, they are only able to claim one employment allowance – not one per payroll. Similarly, groups of companies can only claim one employment allowance for the group.
The employment allowance must be claimed – it is not given automatically. This can be done through the employer’s real time information software. The sooner the allowance is claimed, the sooner the employer is able to benefit from it. However, the allowance can be claimed at any point during the tax year. Where the employer was entitled to the allowance for the previous tax year, a claim can be made until four years after the end of the tax year (e.g., by 5 April 2029 for claims for 2024/25).
Giving effect to the employment allowance
Where an employer is entitled to the employment allowance, it is set against their secondary Class 1 NICs liability each month until it is used up.
Example 1: Gradual use of the employment allowance
An employer has a monthly secondary Class 1 NICs liability of £3,000 in 2025/26. The employer has claimed the employment allowance.
In month 1 (to 5 May 2025), £3,000 of the employment allowance is set against the secondary Class 1 NICs liability for the month, meaning that the employer has no secondary Class 1 NICs to pay over to HMRC in that month. The remaining £7,500 of the employment allowance is carried forward.
In month 2 (to 5 June 2025) a further £3,000 of the employment allowance is set against the liability for the month, meaning that the employer has no secondary Class 1 NICs to pay over to HMRC that month. The remaining £4,500 of the employment allowance is carried forward.
In month 3 (to 5 July 2025), a further £3,000 of the employment allowance is set against the liability for the month, meaning that the employer has no secondary Class 1 NICs to pay over to HMRC that month. The remaining £1,500 of the employment allowance is carried forward.
In month 4 (to 5 August 2025), the remaining employment allowance (£1,500) is less than the secondary Class 1 NICs liability for the month of £3,000. The balance of the employment allowance is set against the secondary Class 1 NICs liability for the month, reducing the amount that the employer needs to pay over to HMRC to £1,500. The employment allowance has now been used in full.
For months 5 onwards, the employer must pay the full secondary Class 1 NICs liability of £3,000 per month over to HMRC.
Impact of the change in the employment allowance
The extent to which an employer is better off or worse off in 2025/26 as compared to 2024/25 as a result of the changes to employer’s NICs will depend on the secondary Class 1 NICs liability and whether they are eligible to claim the employment allowance.
Personal companies who are not entitled to the allowance and who pay the director a salary equal to the personal allowance of £12,570 will pay secondary Class 1 NICs of £1,135.50 (i.e., 15% (£12,570 - £5,000)) in 2025/26 – an increase of £656.64 on their 2024/25 bill of £478.86 (i.e., 13.8% (£12,570 - £9,100)).
At the other end of the scale, for very large employers, the availability of the employment allowance will not make much difference, and they will face substantial rises in their secondary Class 1 NICs bill.
For employers at the margin who want to know how the changes will affect them, there is no substitute for ‘doing the sums’.
Example 2: Contrasting fortunes
A Ltd is a small company with three employees who are each paid £40,000 a year. They are eligible to claim the employment allowance.
In 2024/25, the secondary Class 1 NICs liability was £4,264.20 (i.e., 13.8% (£40,000 - £9100)) per employee – a total for the company of £12,792.60. The employment allowance (set at £5,000 for 2024/25) reduces the amount that they pay over to HMRC to £7,792.60.
In 2025/26, the secondary Class 1 NICs bill per employee before taking account of the employment allowance is £5,250 (i.e., 15% (£40,000 - £5,000)) – a total of £15,750. For 2025/26, the employment allowance is £10,500. The allowance reduces the amount that the company must pay to HMRC to £5,250.
The increase in the employment allowance more than offsets the rate rise and the reduction in the secondary threshold, meaning A Ltd pays less in Class 1 NICs than in 2025/26.
B Ltd has seven employees, each of whom is paid £40,000. For 2024/25, they must pay £24,849.40 to HMRC (i.e., (7 x £4,264.20) - £5,000). For 2025/26, they must pay £26,250 (i.e., (7 x £5,250) - £10,500) to HMRC. This is £1,302 more than in 2024/25.
The increase in the employment allowance is not sufficient to offset the combined impact of the increase in the rate of employer’s NICs and the fall in the secondary threshold.
Employers whose secondary Class 1 NICs bill will rise in 2025/26 could look to take on more part-time and fewer full-time workers (which will enable them to access more NICs-free bands) and also consider taking on younger workers under the age of 21 and armed forces veterans who have recently left the armed forces to benefit from the upper secondary thresholds. This will mitigate some of the rises.
Practical tip
Employers who are eligible to claim the employment allowance should make sure that they make the claim as this can reduce the amount of their secondary Class 1 NICs bill by up to £10,500 in 2025/26. The claim can be made via their payroll software package.
