Employment Allowance lets eligible UK employers reduce their employers' Class 1 National Insurance by up to £10,500 a year, as of October 2026. You claim it through your payroll software, and it's used up each time you run payroll until the £10,500 has gone or the tax year ends.
For a small business with a few staff, that can wipe out the employer National Insurance bill entirely. But there's one rule that stops many one-person limited companies from claiming, and one setting in your payroll software that can take back the whole year's allowance if you tick it at the wrong time. Here's how it works, from GOV.UK.
Employment Allowance at a glance
| What | The rule on GOV.UK |
|---|---|
| Maximum allowance | £10,500 each tax year |
| What it reduces | Employers' (secondary) Class 1 National Insurance only |
| If your bill is lower | You can still claim; you just use less than the maximum |
| Large employers | From April 2025, employers with more than £100,000 of Class 1 liabilities can apply |
| How it's applied | Against each payroll run until it's used or the tax year ends |
| Groups and multiple payrolls | One company per group, and one payroll only |
Smaller employers sometimes assume it isn't worth the bother. It is: GOV.UK says you can still claim if your employer National Insurance liability is less than £10,500 a year. The allowance simply covers the bill you have, payroll by payroll, so for many small teams it means no employer National Insurance to pay at all until it runs out.
Who can claim
GOV.UK says you can claim for the current tax year if you're a business or public body and you do less than half your work in the public sector, such as for local councils or NHS services. Charities, including community amateur sports clubs, can claim too, and so can people who employ a care or support worker, for example to look after someone with a disability.
The old rule that shut out larger employers has gone. GOV.UK says that from April 2025, employers paying more than £100,000 in Class 1 National Insurance liabilities can apply.
The one-director catch
This is the rule most small company owners trip over. GOV.UK says that if your company has only one director, they must not be the only employee liable for secondary Class 1 National Insurance. In plain terms, a limited company where the sole director is the only person on the payroll can't claim. Take on a paid employee, or have a second director on the payroll who also triggers employer National Insurance, and the position can change. Check this before you count on the saving in your budget.
Employees you can't count
- Someone whose earnings fall within the IR35 off-payroll working rules
- Someone you employ for personal, household or domestic work, such as a nanny or gardener, unless they're a care or support worker
If you're part of a group of connected companies or charities, only one company in the group can claim. And if you run more than one payroll, you can only claim against one of them.
How to claim
- If you use payroll software, put Yes in the Employment Allowance indicator field the next time you send an Employment Payment Summary (EPS) to HMRC.
- If your software doesn't have that field, use HMRC's Basic PAYE Tools instead.
- In Basic PAYE Tools, choose the employer, select Employment Allowance, check the eligibility criteria and send your EPS as normal.
- If you're claiming for a previous tax year and the de minimis state aid rules apply, select your business sectors; GOV.UK says most businesses choose Industrial/other, for example a hair salon or restaurant.
Don't switch it off by accident
Here's the setting that costs people. If you stop being eligible, you select No in the indicator field on your next EPS. But GOV.UK says if you stop your claim before the end of the tax year on 5 April, any allowance you've been given that year will be removed, and you'll pay the employer National Insurance that becomes due as a result.
GOV.UK also says don't select No just because you've used up the £10,500 before the year ends, which doesn't make you ineligible, or because you've stopped employing anyone, as the allowance stops at the end of the tax year anyway. If your bookkeeper is tidying up payroll settings mid-year, make sure they know this.
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Where it fits in your payroll costs
Employment Allowance only touches employer Class 1 National Insurance. It doesn't reduce your employees' own National Insurance, their Income Tax, pension contributions or your own self-employed National Insurance if you're a sole trader. For that last one, my guide to Class 2 National Insurance covers how it works now. If you're setting up payroll for the first time, UK payroll software with an Employment Allowance indicator built into the EPS saves a manual step.
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My verdict
If you employ at least one person besides a sole director, switch Employment Allowance on in your payroll software today; it's a few clicks for up to £10,500 off employer National Insurance each year. If you're a one-person company, you can't claim it on your own salary, so don't let anyone sell you a scheme that says otherwise. And never set the indicator to No mid-year unless you've stopped being eligible.
Staff costs start with the legal wage floor, and our UK minimum wage guide lists the current rates by age.
Frequently asked questions
How much is the Employment Allowance?
As of October 2026, GOV.UK says eligible employers can reduce their annual National Insurance liability by up to £10,500.
Can a sole director claim Employment Allowance?
Not if they're the only employee. GOV.UK says if your company has only one director, they must not be the only employee liable for secondary Class 1 National Insurance.
Can large employers claim Employment Allowance?
Yes. GOV.UK says that from April 2025, employers paying more than £100,000 in Class 1 National Insurance liabilities can apply.
How do I claim Employment Allowance?
Put Yes in the Employment Allowance indicator field next time you send an Employment Payment Summary to HMRC, or use HMRC's Basic PAYE Tools if your software doesn't have the field.
Can I count an employee inside IR35?
No. GOV.UK says you can't include someone whose earnings are within the IR35 off-payroll working rules.
What happens if I stop my claim mid-year?
GOV.UK says if you stop your claim before the end of the tax year on 5 April, any allowance you've been given that year will be removed.
Can a group of companies each claim?
No. Only one company in a group of connected companies or charities can claim the allowance.
