Sarah Bradford highlights the benefits of the employment allowance and outlines the eligibility conditions.
The employment allowance is a National Insurance allowance which eligible employers can set against their secondary Class 1 National Insurance contributions (NICs) liability. The allowance is set at £10,500 for 2025/26. However, it is capped at the amount of the employer’s secondary Class 1 NICs liability for the year, where this is lower.
The secondary Class 1 NICs landscape changed quite significantly from 6 April 2025. From that date, the secondary Class 1 NICs rate rose to 15% (from 13.8%) and the secondary threshold fell to £5,000 a year (£96 per week, £417 per month) from £9,100 a year (£175 per week, £758 per month).
To partially mitigate the impact of these changes, the employment allowance was increased from £5,000 to £10,500. Its availability was also widened to enable employers with a Class 1 NICs bill of £100,000 or more to qualify – previously, employers with a Class 1 NICs bill of £100,000 or more in the previous tax year were not eligible to claim the allowance.
Nature of the employment allowance
Employers in receipt of the employment allowance are able to set it against their secondary Class 1 NICs liability for the year. This means that they will not pay any secondary Class 1 NICs liability until the allowance has been used up, providing a welcome cashflow boost at the start of the tax year. For smaller employers whose secondary Class 1 NICs liability for 2025/26 is less than £10,500, this means that if they are eligible for the allowance, they will not pay any secondary Class 1 NICs for the tax year.
The employment allowance can only be set against the secondary Class 1 NICs liability for the year, and where this is less than £10,500, the allowance is capped at the liability for the year – it is not possible to set the amount against other employer liabilities, such as Class 1A or Class 1B NICs, or to carry the unused amount forward to the next tax year.
Example 1: A small business
A Ltd is a family company with two employees who are both paid £1,040 a month. For 2025/26, the associated secondary Class 1 NICs liability on a salary of £1,040 a month is £93.45 – a total monthly liability of £186.90. As the annual secondary Class 1 NICs liability of A Ltd for 2025/26 is only £2,242.80 (i.e., 12 x £186.90), this is completely offset by the employment allowance for the year so that A Ltd pays no secondary Class 1 NICs.
Their employment allowance for the year is capped at their annual secondary Class 1 NICs liability of £2,242.80.
Example 2: Employment allowance used in full
B Ltd has a number of employees and an annual secondary Class 1 NICs liability of £2,450 a month in 2024/25. Its liability is completely offset by the employment allowance for the first four months of the tax year so that it pays no secondary Class 1 NICs over to HMRC for those months. This uses up £9,800 of the employment allowance (i.e., 4 x £2,450). The remaining £700 of the employment allowance is set against B Ltd’s NICs liability for month 5, reducing it to £1,750 (i.e., £2,450 - £700).
As the employment allowance has now been used up, B Ltd must pay the full amount of their secondary Class 1 NICs liability of £2,450 a month over to HMRC for the remaining months (months 6 to 12) of the 2025/26 tax year.
Excluded employers
The employment allowance is only available to eligible employers. To qualify, a person must be the secondary contributor (which will normally be the employer) in relation to the payment of earnings to or for the benefit of one or more employed earners and, in consequence, must be liable to pay secondary Class 1 NICs liability, and must not be an excluded employer.
The main category of excluded employers is companies where the sole employee in respect of whom secondary Class 1 NICs are payable is also a director. Most personal companies will fall within this exclusion and will not be able to benefit from the employment allowance.
A business or public body which does 50% or more of its work for a public body (such as the NHS) is also excluded from claiming the employment allowance. Previously, employers whose Class 1 NICs liability was more than £100,000 in the previous tax year were not able to benefit from the employment allowance. However, this restriction has been lifted from 2025/26.
Multiple payrolls
An employer is only able to claim one employment allowance, regardless of how many payrolls they operate – the allowance is available per employer, rather than per payroll.
Consequently, there is no benefit in operating multiple payrolls in an attempt to reduce the secondary Class 1 NICs liability for the year.
Groups of companies
In a group of companies with more than one employer, the group as a whole is only entitled to one employment allowance. Each individual employer within the group is unable to benefit from their own employment allowance, and the group as a whole must decide which employer will claim the allowance.
To ensure that maximum benefit is received, it should be claimed by an employer with a secondary Class 1 NICs liability of at least £10,500 a year. If none of the employers have a secondary liability at this level, the allowance should ideally be claimed by the employer with the highest secondary Class 1 NICs bill.
Personal companies
Most personal companies do not qualify for the employment allowance as the same person is both the sole employee and the director. Profits from a personal company have to be extracted to be used by the director personally, and for 2025/26, the optimum salary where the director’s personal allowance is available in full is one equal to the personal allowance for the year of £12,570.
As this is equal to the primary threshold, the director will not pay any primary Class 1 NICs on a salary at that level. For 2025/26, the secondary threshold is set at £5,000. Consequently, as the employment allowance is not available, the company will pay secondary Class 1 NICs of £1,135.50 in 2025/26 on a salary of £12,570.
For a year to be a qualifying year for state pension purposes, an individual must have earnings of at least equal to 52 times the weekly lower earnings limit, which for 2025/26 is £6,500. As this is in excess of the secondary threshold, it is not possible for a director of a personal company to secure a qualifying year for 2025/26 without paying some secondary contributions. On a salary of £6,500, the associated secondary Class 1 NICs bill is £225.
To bring a personal company within the scope of the employment allowance, there are a couple of options. The first is for the sole employee not to be a director. By resigning as the director and appointing a spouse or family member as a director instead, the company will qualify for the employment allowance as long as secondary contributions are due on earnings paid to the sole employee.
The second way to qualify for the employment allowance is to take on another employee in respect of whom secondary contributions are payable. The reduction in the secondary threshold means that the amount that a second employee has to be paid to tick this box is now less than in the past. There is no requirement that secondary contributions are payable throughout the tax year, only that a secondary Class 1 NICs liability arises on the earnings of more than one employee. This can be achieved by paying a second employee more than £96 for at least one week in the tax year.
Claiming the allowance
The employment allowance is not given automatically and must be claimed. This can be done through the payroll software in the ‘employer payment summary’ (EPS). A claim can also be made via HMRC’s Basic PAYE Tools package. The earlier in the tax year the claim is made, the sooner the employer can benefit from it.
Employers who were eligible for the allowance in previous tax years and who did not make a claim may be able to make a claim for the four previous tax years.
Practical tip
Personal companies where the sole employee is also the director could look at taking on another employee paid more than £96 for at least one week in the tax year to bring them within the scope of the employment allowance.
