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Understanding the Employment Allowance: What Employers Need to Know
Advice from A D Pottie Chartered Accountants | July 2025The Employment Allowance is a valuable relief that can help reduce the cost of employing staff — particularly useful for smaller businesses. From the 2025/26 tax year, changes to National Insurance rules have made this allowance even more relevant.
Here, we explain what the Employment Allowance is, how much you can claim, who qualifies, and how to make the most of it.
What Is the Employment Allowance?
The Employment Allowance allows eligible employers to reduce their secondary Class 1 National Insurance contributions (NICs) by up to £10,500 for the 2025/26 tax year. If your secondary Class 1 NICs bill is less than £10,500, the allowance is capped at your actual liability.
This relief effectively means you won’t pay any employer NICs until the allowance is used up — helping with cash flow early in the tax year.
What’s Changed in 2025/26?
From 6 April 2025:
The employer NICs rate increased from 13.8% to 15%
The secondary NICs threshold fell to £5,000 per year
The Employment Allowance doubled, from £5,000 to £10,500
The allowance is now available to larger employers, including those with NICs bills over £100,000 (previously excluded)
These changes are designed to ease the impact of higher NIC costs on employers.
Who Can Claim the Employment Allowance?
You may claim if:
You are liable for secondary Class 1 NICs on employees’ earnings
You are not an excluded employer
Excluded Employers Include:
Personal companies where the only employee is also a director
Employers doing 50% or more work for public bodies (e.g. NHS)
Employers who’ve already claimed the allowance via another payroll or group company
How the Allowance Works in Practice
Example 1: Small Employer
A Ltd employs two staff paid £1,040/month each.
Annual secondary NICs = £2,242.80
This is fully covered by the £10,500 Employment Allowance, so A Ltd pays no employer NICs in 2025/26.
Example 2: Larger Employer
B Ltd pays £2,450/month in employer NICs.
For the first 4 months, the allowance covers the full monthly liability (£9,800)
In month 5, £700 of the allowance offsets part of the bill
From month 6 onward, B Ltd resumes full monthly payments
What If You Operate Multiple Payrolls or Companies?
Only one claim per employer, regardless of how many payrolls you operate
In company groups, only one company in the group can claim the allowance
Ideally, the allowance should be claimed by the entity with at least £10,500 in employer NICs to get full benefit
Personal Companies: Can They Qualify?
Most personal service companies won’t qualify if:
The only employee is also the director
However, there are two ways to bring your company into scope:
Appoint a second employee, even part-time
Paying someone over £96 for at least one week in the tax year creates NIC liability — enough to qualify
Change the director/employee structure
If the sole employee is not the director (e.g. your spouse is appointed instead), the company may become eligible
Example:
A director pays themselves £12,570 (the personal allowance)
Secondary NICs payable = £1,135.50
Without the Employment Allowance, this amount is payable
With a qualifying second employee, this could be reduced to £0
How to Claim the Allowance
It’s not automatic — employers must claim it via:
Their payroll software (through the Employer Payment Summary)
HMRC’s Basic PAYE Tools (for smaller employers)
The earlier you claim, the sooner the benefit applies.
You can also claim retrospectively for the previous four tax years, if eligible but not yet claimed.
Practical Tip from A D Pottie
If you’re a director-only company, consider:
Taking on another employee, even on a temporary or low-hours basis
Paying them more than £96 in a single week during the tax year
This small step could save up to £10,500 in NICs — a significant benefit for a small employer.
Need Help with Your Claim?
We can advise you on:
Your eligibility
Structuring your payroll to qualify
Backdating claims where applicable
📞 Contact your usual advisor at A D Pottie or
📩 Get in touch here to make sure you’re making the most of the Employment Allowance.