What the Employment Allowance is
The Employment Allowance is a relief that reduces an eligible employer's annual Class 1 employer NI liability. From April 2026, the maximum allowance is £10,500 per tax year — an increase from £5,000 in 2024/25 and £10,500 carried forward from 2026/27. The allowance is available to businesses and charities that have at least one employee whose earnings are above the secondary NI threshold. It does not reduce employee NI, pension contributions or income tax — only the employer's own NI bill.
The relief works by accumulating through the tax year. Each time employer NI is due, the allowance is applied to reduce the liability until the £10,500 is exhausted. A small employer whose total annual employer NI bill is £7,000 will pay zero employer NI for the year. An employer with a £15,000 annual NI bill will pay the first £10,500 from the allowance and the remaining £4,500 from their own funds. The allowance cannot be carried forward — any unused portion at 5 April is lost.
Critically, to qualify the employer must have at least one employee who is not a sole director. Companies where the only person earning above the NI threshold is a director with no other employees are explicitly excluded. This is one of the most commonly misunderstood aspects of the allowance, and it catches a significant number of one-person limited companies each year.
Who qualifies and who does not
Most UK businesses with staff are eligible: limited companies, sole traders who employ people, partnerships with employees, and charities. The key criteria are that Class 1 employer NI is payable in respect of at least one employee, and that the employee is not the sole director of the company with no other employees above the threshold.
The sole director exclusion is the most important in practice. A limited company where the director is the only person on the payroll — even if they pay themselves a salary well above the secondary threshold — cannot claim. As soon as a second employee earns above the threshold, the company becomes eligible. This is why some owner-managed businesses choose to put a spouse or other family member on a minimal payroll: once a second person crosses the threshold, the allowance unlocks. Any such arrangement must reflect genuine employment.
Connected companies rules mean that if you control two or more companies or charities, they share a single Employment Allowance between them — they cannot each claim the full £10,500. The allowance is allocated by agreement between the connected entities or defaults to the entity with the largest NI bill. Domestic employers — individuals who employ nannies, cleaners or carers in a personal rather than business capacity — are also excluded. Public bodies funded wholly or mainly from public funds cannot claim either.
How to claim via RTI
Claiming is done through payroll software rather than a separate HMRC form. At the start of the tax year, you set an Employment Allowance indicator in your Employer Payment Summary (EPS) settings. Most payroll software — Xero, Sage, QuickBooks, FreeAgent, HMRC Basic PAYE Tools — includes this as a checkbox or toggle in your employer settings. When the EPS is submitted to HMRC, the declaration is transmitted automatically.
Once the indicator is set, the allowance is applied cumulatively against employer NI each pay period. You do not pay employer NI until the cumulative NI for the year exceeds £10,500. If you pay monthly, the first month's employer NI is offset first, then the second month's, and so on. Once the allowance is exhausted, NI is payable at the standard rate for the rest of the year.
You must re-declare eligibility each tax year — the claim does not roll over automatically. If you change payroll software mid-year, confirm that the Employment Allowance indicator is correctly set in the new system. A common error is the indicator not transferring during software migration, resulting in NI being overpaid for the remainder of the year. Overpaid NI can be reclaimed but requires an amended EPS submission and delays cashflow.
Practical examples at different payroll sizes
A two-person company where both employees earn £30,000 per year generates total employer NI of approximately £7,500 per year (2 × £3,750). Employment Allowance of £10,500 covers the entire bill — the employer pays zero employer NI for the year and saves £7,500 in cash. The unused £3,000 of allowance is lost at year-end.
A five-person firm where all employees earn £40,000 per year generates total employer NI of approximately £26,250 per year (5 × £5,250). Employment Allowance of £10,500 reduces the net NI payable to approximately £15,750 per year — a saving of £10,500 in cash, representing about 40% of the gross NI bill. The saving is worth roughly £875 per month to the business.
For a ten-person business with mixed salaries averaging £35,000, total employer NI is approximately £45,000 per year. Employment Allowance reduces this by £10,500, leaving net NI of approximately £34,500. The percentage saving is smaller at this scale but the absolute cash saving is the same £10,500 per year. For businesses at this size, the allowance has a meaningful impact on the first two months of NI payments in the tax year.