The Employment Allowance is a relief that reduces an employer's secondary Class 1 NIC bill. In April 2025 it was increased to £10,500 per qualifying employer per year — more than double its previous £5,000 level — and the previous £100,000 secondary NIC cap was scrapped. For small and medium-sized employers, the change is one of the most valuable in the current NIC regime.
How the allowance works
The Employment Allowance reduces the employer's secondary Class 1 NIC liability by up to £10,500 per tax year. It is claimed through payroll software using the EPS (Employer Payment Summary). Once claimed, the allowance is applied automatically against employer NIC liabilities until it is used up or the tax year ends.
For a typical small employer with a payroll NIC bill of £8,000 a year, the allowance effectively covers the entire employer NIC charge — saving £8,000.
Who qualifies
- Most businesses, charities, and community amateur sports clubs.
- Must have at least one employee whose earnings are above the Secondary Threshold (£5,000 in 2025/26 and 2026/27).
- The employer must have had employer's NIC liabilities in the relevant period.
Who does NOT qualify — the single-director trap
The single biggest catch is the single-director rule. A limited company with only one director and no other employees paid above the Secondary Threshold cannot claim the Employment Allowance. The rule was introduced to prevent service companies from using the allowance purely to extract director income.
Adding a second employee — typically a spouse or family member who genuinely works in the business — at a salary above £5,000 can unlock the allowance. The spouse must perform real work; HMRC will challenge wholly artificial arrangements. Done properly, this is one of the most cost-effective tax planning steps available to owner-managed businesses.
Other exclusions
- Public bodies and businesses doing more than half their work in the public sector (subject to certain exceptions).
- Employers of domestic staff (with limited exceptions for care and support workers).
- Companies that are part of a group — only one company in the group can claim.
- Connected employers can only claim one Employment Allowance between them.
The state aid / de minimis rule — gone
Previously, the Employment Allowance was treated as de minimis state aid, capping the amount that businesses subject to state aid rules (mainly agriculture, fisheries, and some transport sectors) could claim. The de minimis cap was removed from April 2024, making the allowance available regardless of state aid status.
Claiming for past years
The Employment Allowance can be claimed retrospectively for up to four tax years. If you only realised in 2026 that you were eligible in 2023/24, a claim is still possible. We have recovered tens of thousands of pounds for clients who simply hadn't realised they qualified. Our payroll team reviews this for every new client onboarding.
Maximising the Employment Allowance — director salary optimisation
For companies that qualify for the Employment Allowance, the optimal director salary calculation shifts:
- Without Employment Allowance: director salary typically pitched at the Secondary Threshold (£5,000) to avoid employer NIC.
- With Employment Allowance: director salary often optimised at the personal allowance (£12,570) — the additional employer NIC (£1,135.50 per director) is absorbed by the allowance, while the additional corporation tax relief and personal tax saving outweigh the cost.
For some companies with two or three directors, pushing salary even higher within the allowance can be efficient. We run this calculation for every owner-managed client at the start of each tax year.
Worked example
A company with one director and one part-time bookkeeper (the bookkeeper paid £15,000). Employer NIC on the bookkeeper at 15% above the £5,000 threshold = £1,500. The director earns £12,570; employer NIC = £1,135.50. Total employer NIC: £2,635.50. The Employment Allowance covers this in full, saving £2,635.50 of NIC for the year. The corporation tax saving on the additional director salary above £5,000 (assuming 26.5% marginal rate) is around £2,000. Net benefit versus the lower-salary route: typically £1,500–£2,000 per year, repeated annually.
Action items
- Check your payroll software is set to claim the Employment Allowance — it does not happen automatically without an active election.
- Review whether you have ever claimed in the last four years — if not, file a retrospective claim.
- If you operate as a single-director company, model the impact of adding a genuine second employee.
- Re-optimise director salaries each April when the new rates kick in.
Our payroll service includes Employment Allowance review as standard for every client. If you are running payroll yourself and unsure whether you qualify, drop us a line — the answer takes 10 minutes and could be worth £10,500.