The Employment Allowance reduces an employer's National Insurance bill by up to £10,500 per tax year from April 2025 (raised from the previous £5,000). For small and medium-sized businesses with staff above the secondary threshold, it is one of the most straightforward tax reliefs in the UK system — but every year a meaningful minority of eligible employers either fail to claim, claim incorrectly, or continue to claim after they have lost eligibility.
How the allowance works
Once claimed, the allowance is applied automatically against Employer NIC each pay period until either £10,500 has been used up or the tax year ends. There is no separate refund — it simply reduces the monthly PAYE/NIC payment to HMRC. For an employer with a £40,000 Employer NIC bill, the allowance reduces it to £29,500 — a straight £10,500 cash saving.
Who is eligible
Most UK businesses, charities, and Community Amateur Sports Clubs qualify. From April 2025 the historic £100,000 prior-year liability cap has been removed, expanding eligibility considerably. The main exclusions remain:
- Single-director companies with no other employees. A limited company where the sole employee is also the sole director cannot claim. Adding a second employee — even a part-time admin — restores eligibility, provided that employee is paid above the secondary threshold.
- Public-sector bodies doing more than 50% public-sector work (with limited exceptions for charitable activity).
- Employers of personal/domestic staff (nannies, gardeners, housekeepers), unless the worker is providing care for someone with a disability.
- Connected companies — a group of companies under common control can only claim one Employment Allowance between them, allocated to whichever company the group nominates.
The "more than one employee" rule for single-director companies
This catches more clients than any other rule. A typical pattern: a freelancer incorporates, becomes the sole director and sole employee, takes a small salary, and assumes they can claim the allowance. They cannot. The exclusion was introduced specifically to prevent personal service companies using the allowance as a tax avoidance lever.
The fix is straightforward — bring in a second person on a genuine employment contract, paid above the secondary threshold of £5,000. Many owner-managers add a spouse who is genuinely working in the business; the test is whether the role is real and the salary commercial. Cosmetic appointments are challenged successfully by HMRC.
How to claim
The claim is made through PAYE — most commercial payroll software has a tick-box that submits the claim via the next Employer Payment Submission (EPS). You only need to claim once per tax year. The claim is not retroactive across tax years by default, but you can claim for the current and four previous tax years if you have been eligible and missed out.
Common errors
- Claiming when ineligible. The most common is the single-director company. HMRC reconciles claims against PAYE data and recovers overclaimed amounts, often with interest.
- Forgetting to claim. The allowance does not roll forward — if you fail to claim in 2025-26 you have lost that year's £10,500 (subject to the 4-year backdating window).
- Splitting claims across group companies. Only one company in a connected group can claim; the others must opt out.
- Continuing to claim after losing eligibility. If your only second employee leaves and you become a single-director company mid-year, the claim must stop from that point.
The savings in practice
For example, a marketing agency with 8 employees and £180,000 of total salary cost has Employer NIC of around £25,000 a year (15% on £180,000 less the £5,000 threshold times 8 employees, broadly). The £10,500 allowance reduces that to £14,500 — a saving worth more than a junior salary in cash terms.
What PushDigits does
Our payroll service claims Employment Allowance automatically for every eligible client at the start of each tax year, monitors eligibility throughout the year, and stops the claim if circumstances change. Our business advisory team reviews group structures annually to ensure the allowance is allocated to the most useful company.
If you are not sure whether you are claiming, or claiming correctly, book a payroll review or get in touch via our contact page. We will check the last four tax years and recover anything you have missed.