Employment Allowance
The Employment Allowance reduces an employer's National Insurance liability by up to £10,500 per year. This guide covers eligibility, how to claim, and the rules that determine whether your business qualifies.
What Is the Employment Allowance?
The Employment Allowance is a government relief that allows eligible employers to reduce their employer Class 1 National Insurance contributions (NICs) by up to £10,500 per tax year (2024/25 onwards). It was introduced in 2014 and has been increased several times since.
This means a qualifying employer pays £10,500 less in employer NICs each year. For many small businesses, this covers their entire employer NIC liability, effectively eliminating it.
How Much Can You Save?
| Tax Year | Maximum Allowance |
|---|---|
| 2014/15 to 2015/16 | £2,000 |
| 2016/17 to 2019/20 | £3,000 |
| 2020/21 to 2021/22 | £4,000 |
| 2022/23 to 2023/24 | £5,000 |
| 2024/25 onwards | £10,500 |
The allowance is set against your employer Class 1 NICs (the secondary contributions, currently 13.8% of earnings above the secondary threshold). It does not reduce employee NICs, Class 1A NICs on benefits, or Class 1B NICs on PAYE settlement agreements.
Who Can Claim?
Most employers can claim the Employment Allowance. You are eligible if you:
- Are an employer paying Class 1 NICs on employees’ earnings
- Had employer NIC liability of £100,000 or less in the previous tax year
Employers That Cannot Claim
The following are excluded from the Employment Allowance:
- Employers whose employer NIC liability in the previous tax year exceeded £100,000
- Public bodies and businesses carrying out more than 50% of their work for public bodies (central and local government, NHS, etc.)
- Companies where the sole employee is also a director — if you are the only person on the payroll and you are a director, you cannot claim
- Domestic employers (employing someone for personal, household, or domestic work)
- Businesses operating through managed service companies
Companies with a Single Director-Employee
If a private limited company has only one employee who is also a director, it cannot claim the Employment Allowance. However, if the company employs at least one other person (even part-time), the director-only exclusion no longer applies and the company can claim.
How to Claim
The Employment Allowance is claimed through your payroll software at the start of each tax year, or at any point during the year if you become eligible:
- Confirm your eligibility through the Employment Payment Summary (EPS)
- Set the Employment Allowance indicator to Yes in your payroll software
- Submit the EPS to HMRC through Real Time Information (RTI)
- The allowance is automatically applied against your employer NICs going forward
You do not need to reclaim separately for each pay period. Once activated, the allowance reduces your employer NIC liability each time you run payroll until the £10,500 is used up or the tax year ends.
Mid-Year Claims
If you start a new business or become eligible part-way through the tax year, you can claim at any time. The full £10,500 is available regardless of when in the year you start claiming. You can also claim retrospectively for the current tax year if you were eligible but had not activated the claim.
How It Reduces Your PAYE Bill
The Employment Allowance works by reducing the amount of employer NICs due each pay period:
Example: Monthly Payroll
| Month | Employer NICs Before Allowance | Allowance Applied | NICs Payable |
|---|---|---|---|
| April | £1,200 | £1,200 | £0 |
| May | £1,200 | £1,200 | £0 |
| June | £1,200 | £1,200 | £0 |
| July | £1,200 | £1,200 | £0 |
| August | £1,200 | £1,200 | £0 |
| September | £1,200 | £1,200 | £0 |
| October | £1,200 | £1,200 | £0 |
| November | £1,200 | £1,200 | £0 |
| December | £1,200 | £900 (remaining) | £300 |
| January to March | £1,200 each | £0 (fully used) | £1,200 each |
| Total | £14,400 | £10,500 | £3,900 |
In this example, the business saves £10,500 over the year. The PAYE payments to HMRC are reduced accordingly.
Connected Employers
Only one Employment Allowance can be claimed per group of connected employers. Employers are connected if:
- One company controls the other
- Both are under common control
- They are part of the same group of companies
- The businesses are connected through common ownership by the same individuals
If you operate multiple businesses, you must nominate one employer to receive the allowance. You cannot split it between connected entities.
Interaction with Other Employment Costs
National Insurance
The Employment Allowance only reduces employer Class 1 NICs. It does not affect:
- Employee National Insurance deductions
- Employer Class 1A NICs on benefits in kind
- Class 1B NICs on items in a PAYE Settlement Agreement
- Apprenticeship Levy (payable by employers with pay bills over £3 million)
Tax-Deductible Expenses
The employer NICs you actually pay (after the Employment Allowance) are a tax-deductible expense for corporation tax or income tax . The Employment Allowance itself is not treated as taxable income — it simply reduces the NIC cost.
State Aid
Since April 2020, the Employment Allowance has been classified as de minimis state aid. Businesses must confirm they have not exceeded the €200,000 de minimis state aid threshold over a rolling 3-year period (or €100,000 for road freight businesses). Most small businesses will be well within this limit.
Record Keeping
You should keep records showing:
- Your eligibility for the Employment Allowance each tax year
- The EPS submissions confirming the claim
- Payroll records showing how the allowance was applied
- Records of any other de minimis state aid received
These records form part of your overall accounting records and should be retained for at least 3 years after the end of the tax year to which they relate, in line with PAYE record-keeping requirements.
Common Mistakes
- Claiming when ineligible — particularly single director-only companies
- Claiming in multiple connected companies — only one claim per group
- Forgetting to reclaim each year — the allowance must be activated afresh each tax year through the EPS
- Exceeding the de minimis state aid limit — relevant for businesses receiving other forms of state aid
- Not accounting for the allowance correctly in management accounts, leading to inaccurate cash flow forecasts
How the Employment Allowance Fits into Payroll
The Employment Allowance is part of the broader PAYE system. Each pay period, your payroll software calculates the total employer NICs due and offsets the Employment Allowance before determining the amount payable to HMRC. Under Making Tax Digital and RTI, this is all reported electronically.
Interaction with Apprenticeship Levy
The Employment Allowance is separate from the Apprenticeship Levy. Employers with a total pay bill exceeding £3 million per year must pay the Apprenticeship Levy at 0.5% of total pay. The Employment Allowance does not reduce the levy liability — it only reduces Class 1 employer NICs.
However, the levy allowance of £15,000 works in a similar way to the Employment Allowance, offsetting the first £15,000 of the levy each year.
Checking Eligibility Each Year
Eligibility must be reassessed at the start of each tax year. Changes that could affect eligibility include:
- The company’s employer NIC liability in the previous year exceeding £100,000
- A company becoming a single director-only employer (other employees leaving)
- The business becoming part of a public sector body or taking on substantial public sector work
- Changes in group structure affecting which entity claims the allowance
If circumstances change during the year such that the claim is no longer valid, the employer must stop claiming and repay any excess allowance through the next EPS submission.