What is Employment Allowance? A Detailed Guide on 2026
Employment Allowance can save an eligible UK employer up to £10,500 a year in Employer’s National Insurance — but a surprising number of small companies either don’t qualify, or qualify and simply forget to claim it. This guide from Filing Accounts UK covers exactly what Employment Allowance is, who’s eligible, how to claim it, and worked examples, using only verified facts from official HMRC guidance.
At Filing Accounts, we help UK small businesses claim Employment Allowance correctly as part of payroll setup. Full official guidance is available at GOV.UK: Claim Employment Allowance.
What Is Employment Allowance?
Employment Allowance is a government scheme, introduced in 2014, that lets eligible employers reduce their employer Class 1 National Insurance Contributions (Employer’s NIC) bill each year. It isn’t a cash payment — instead, it works by offsetting your Employer’s NIC liability each time you run payroll, until the full allowance has been used up or the tax year ends, whichever comes first.
How Much Is Employment Allowance in 2026?
For the 2026/27 tax year, the Employment Allowance is £10,500 per business — the same level that applied in 2025/26, when the allowance more than doubled from its previous £5,000 cap.
| Tax Year | Employment Allowance |
|---|---|
| 2024/25 | £5,000 |
| 2025/26 | £10,500 |
| 2026/27 | £10,500 |
The allowance applies per business, not per employee, and — if your business has multiple PAYE schemes — it can only be claimed against one of them.
Who Is Eligible for Employment Allowance?
You can claim Employment Allowance if your business, charity, or Community Amateur Sports Club (CASC) meets all of the following:
- You’re registered as an employer with HMRC and operate a PAYE scheme
- You pay employer Class 1 National Insurance on at least one employee’s earnings
- Your business does not do more than half its work in the public sector (charities and CASCs are exempt from this exclusion)
Since 6 April 2025, the previous rule excluding employers whose employer Class 1 NIC bill exceeded £100,000 in the prior tax year has been removed. All eligible employers, regardless of payroll size, can now claim the full allowance.
The Sole-Director Rule (This Catches Out a Lot of Small Companies)
Employment Allowance is not available to a limited company where the only employee liable for secondary (employer) Class 1 NIC is also a director. In practice, this means most single-director, no-other-staff “personal” companies cannot claim it. However, if there are two or more directors, and more than one of them earns above the secondary Class 1 NIC threshold, the company can claim — even if there are no other staff.
Who Cannot Claim
- Sole traders and freelancers — they don’t pay Class 1 NIC (they pay Class 2 and Class 4 on profits instead)
- Single-director companies with no other employees earning above the secondary threshold
- Off-payroll (IR35) workers engaged through their own intermediary
- Individuals employed for personal, non-business work — such as a nanny, cleaner, or gardener — except where that person is a care or support worker
- Umbrella companies’ individual contractors — the umbrella company is the employer and may claim for its own staff, but this doesn’t pass through to the contractor personally
Practical Example: How the Saving Works
Example 1 — Full year saving. A small company’s total employer Class 1 NIC bill for the 2026/27 tax year comes to £18,000. Employment Allowance covers the first £10,500 of this. The company only pays HMRC the remaining £7,500 across the year, instead of the full £18,000.
Example 2 — Allowance used up partway through the year. A company claims Employment Allowance for 2026/27. Its monthly employer NIC liability is £3,500. The allowance covers this in full for months one, two, and three (3 × £3,500 = £10,500 — exactly using up the allowance). In month four, the company’s £3,500 liability is no longer covered, so it pays that in full, and continues paying its full employer NIC liability for months five through twelve, since the allowance has already been exhausted.
Example 3 — Hiring partway through the year. A company takes on its second employee in month six of the tax year, making it newly eligible for Employment Allowance (having previously been a sole-director company). It can claim the allowance for the entire tax year, not just from month six — meaning any employer NIC already paid in months one to five can also be offset retrospectively against the allowance.
How to Claim Employment Allowance
Employment Allowance is not given automatically — you must actively claim it, and re-claim it every tax year.
- Via payroll software: Select “Yes” in the Employment Allowance indicator field the next time you send an Employer Payment Summary (EPS) to HMRC.
- Via HMRC’s Basic PAYE Tools: If your payroll software doesn’t support this, you can claim using HMRC’s free Basic PAYE Tools package instead.
- Timing: You can claim at any point during the tax year, and the sooner you claim, the sooner you benefit — many advisers recommend claiming at the end of the first month of the new tax year.
- Once per tax year: You only need to submit the claim indicator once — you don’t need to repeat it on every subsequent EPS that tax year.
From 2026/27, the process is simpler than in previous years: since Employment Allowance was removed from the de minimis state aid framework in April 2025, the EPS no longer asks you to select a business sector or confirm state aid compliance.
Can You Backdate a Claim?
Yes — you can backdate an Employment Allowance claim for up to four previous tax years, provided you were eligible at the time but didn’t claim. As of the 2026/27 tax year, that means claims can still be made for 2022/23, 2023/24, 2024/25, and 2025/26. A separate EPS submission is required for each historic year you’re claiming for.
What Happens If You Don’t Use the Full Allowance Against NIC?
If a claim is made late, or the full allowance isn’t used up against employer NIC during the year, you can ask HMRC to set the unclaimed portion against other tax or National Insurance you owe — including VAT or Corporation Tax. If you don’t owe anything else, you can ask HMRC for a refund of the unused amount instead.
What If You Become Ineligible Mid-Year?
If your circumstances change and you no longer meet the eligibility rules — for example, your only other employee leaves, reducing you to a single-director company — you must stop the claim through your payroll software and repay any Employment Allowance already used that year. Common triggers for this include a workforce dropping to just one director, or another connected company in your group claiming the allowance first (since it can generally only be claimed once across a group of connected companies).
Employment Allowance and Directors’ Salaries
For 2026/27, the secondary threshold (the point above which employer NIC becomes payable) is £5,000 per year, with employer NIC charged at 15% above it. Employment Allowance only creates a saving where your company actually pays employer NIC — so it directly affects how much a company benefits from paying directors above this threshold, and is a key factor many small companies weigh up when deciding on the most tax-efficient director’s salary structure each year.
Employment Allowance at a Glance
| Item | Detail |
|---|---|
| 2026/27 allowance | £10,500 per business |
| What it reduces | Employer Class 1 NIC |
| NI liability cap for eligibility | None (removed from 6 April 2025) |
| Sole-director-only companies | Not eligible |
| How to claim | EPS indicator via payroll software or HMRC Basic PAYE Tools |
| Claim frequency | Once per tax year — does not roll over |
| Backdating | Up to 4 previous tax years |
| Unused allowance | Can be set against other taxes owed, or refunded |
Common Mistakes to Avoid
Assuming the Claim Rolls Over Automatically
Employment Allowance must be re-claimed every tax year via a fresh EPS submission — a surprising number of employers claim successfully in year one, then lose the saving for an entire year after forgetting to resubmit.
Not Realising a Sole-Director Company Doesn’t Qualify
If you’re the only employee and also a director, the company cannot claim Employment Allowance — this is one of the most common eligibility mistakes for small limited companies.
Missing a Change of Payroll Provider
If you switch accountants or payroll software mid-year, always check whether the new provider has re-enabled the claim, since it doesn’t automatically transfer.
Forgetting to Backdate an Eligible But Unclaimed Year
If you were eligible in a previous year but never claimed, check whether you can still backdate — the four-year window means past savings can often still be recovered.
Not Updating HMRC When You Become Ineligible
Continuing to claim after your circumstances change — for example, your only other employee leaves — can mean the allowance needs to be repaid once identified.
Frequently Asked Questions
How much is Employment Allowance in 2026/27?
£10,500 per business, the same level as 2025/26.
Can a one-person limited company claim Employment Allowance?
No, if the sole director is also the only employee liable for secondary Class 1 NIC. If there are two or more directors and more than one earns above the secondary threshold, the company can claim.
Do I need to claim Employment Allowance every year?
Yes. It does not roll over automatically — a fresh claim must be submitted via EPS each tax year.
Can I backdate an Employment Allowance claim?
Yes, for up to 4 previous tax years, provided you were eligible at the time.
Is there still an NIC liability cap for eligibility?
No. The previous £100,000 employer NIC cap was removed from 6 April 2025.
Can sole traders claim Employment Allowance?
No, not against their own profits — sole traders pay Class 2 and Class 4 NIC, not employer Class 1 NIC. However, a sole trader who employs staff and pays employer Class 1 NIC on their wages can claim, if the other eligibility conditions are met.
What happens to unused Employment Allowance at year end?
You can ask HMRC to set it against other taxes owed, such as VAT or Corporation Tax, or request a refund if nothing else is owed.
Can charities claim Employment Allowance?
Yes. Charities and Community Amateur Sports Clubs are exempt from the public sector work exclusion that applies to ordinary businesses.
Need Help With Payroll and Employment Allowance? Talk to Filing Accounts UK
Checking eligibility, claiming correctly, and remembering to re-claim each year are easy things to overlook when you’re focused on running your business. At Filing Accounts, we help UK small businesses set up payroll correctly, including checking and claiming Employment Allowance where eligible.
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