Employment Allowance in 2025/26: How to Maximise the £10,500 NIC Saving
The Employment Allowance continues to offer substantial savings for eligible UK employers. For the 2025/26 tax year, the allowance has increased to £10,500, representing a significant opportunity for small to medium-sized businesses to reduce their employment costs.
This article explores the current rules, eligibility criteria, planning opportunities, and practical steps employers should take to maximise the benefit of the Employment Allowance in the current tax year.
What is the Employment Allowance?
The Employment Allowance is a government relief that allows eligible employers to reduce their annual secondary (employer’s) Class 1 National Insurance contributions (NICs). Introduced to encourage job creation and reduce the burden on smaller employers, it operates by offsetting your employer NICs liability until the full allowance has been used or the tax year ends, whichever is sooner.
The allowance is applied through your payroll software or HMRC’s Basic PAYE Tools, and only needs to be claimed once per year. Once claimed, the reduction is automatically applied to future employer NIC liabilities.
For 2025/26, the maximum relief available is £10,500, which represents a £5,500 increase from the previous £5,000 cap that applied in tax years up to 2024/25.
Eligibility for 2025/26
The key eligibility rules for Employment Allowance are relatively straightforward, but there are specific conditions and exemptions to consider. You can claim the allowance if:
- You are a business, charity, or Community Amateur Sports Club (CASC)
- Your total employer Class 1 NICs liability was less than £100,000 in the 2024/25 tax year
From April 2025, a new rule has come into effect allowing employers who exceed £100,000 in the current tax year to apply for the Employment Allowance, provided they were under the limit in the previous year.
The allowance is applied on a per-business basis, not per employee. If your organisation qualifies, you can use the allowance against all eligible Class 1 NICs in your PAYE scheme, up to the full £10,500 limit.
Restrictions and Exclusions
Not all employers are eligible to claim the Employment Allowance. Exclusions include:
- Sole Director Companies: If your company employs only one person and that person is also the director, you cannot claim the allowance. You must have at least one other employee on the payroll with Class 1 NICs liability to qualify.
- Public Sector Employers: Businesses or public bodies that perform more than 50% of their work in the public sector are generally excluded, unless they are registered charities.
- Domestic Employment: If you employ someone for personal or household work (e.g., a nanny, cleaner or gardener), you cannot claim — unless they are a qualified carer or support worker.
- Off-Payroll Workers: Any earnings that fall within the IR35 off-payroll working rules do not count for Employment Allowance purposes.
These rules are designed to prevent abuse of the relief and to ensure it benefits genuinely small employers and charitable organisations.
Connected Companies and Multiple Payrolls
If your business is part of a group of companies or charities (known as “connected companies”), only one employer within the group may claim the allowance. You must decide which entity makes the claim, and you cannot split the allowance between companies.
Similarly, if your business runs multiple PAYE schemes, you can only claim the Employment Allowance against one of those schemes. Choosing the correct payroll is important, particularly if one scheme has a higher NIC liability than another.
Strategy: How to Maximise the £10,500 Saving
Understanding the mechanics of the Employment Allowance allows businesses to structure their payroll to gain maximum advantage. Below are some planning tips and strategic considerations.
1. Employing Additional Staff
For companies that currently employ only a single director, hiring a part-time employee — even for a few hours per week — could open up eligibility for the allowance. The cost of paying an additional worker may be offset in part by the NIC savings. However, the employee must be genuine, with real duties and wages subject to Class 1 NICs.
2. Use Early in the Tax Year
The allowance is applied automatically through your PAYE submissions, reducing your liability each time you run payroll. Therefore, beginning your claim early in the tax year ensures that you can fully benefit from the allowance, particularly if your NICs liability is spread evenly throughout the year.
Delaying the claim may mean you don’t use the full £10,500 by year-end, especially if your NICs bill is low.
3. Review Connected Companies
Where businesses operate through group structures or have multiple limited companies, the Employment Allowance must be claimed by only one of them. It is worthwhile to review which entity would benefit most, particularly if one company has higher employer NICs or more staff.
HMRC requires that connected companies are considered together when assessing the £100,000 NIC cap. The NIC liabilities of all connected companies are added together to determine whether the group is eligible.
4. Combine with Other Reliefs
The Employment Allowance can be used alongside other reliefs and exemptions to reduce overall employer costs. Examples include:
- Apprenticeship Levy Allowance: Employers with pay bills under £3 million do not pay the levy, but if you’re close to the threshold, this is an additional area to review.
- NIC Relief for Under 21s or Veterans: Employers do not pay Class 1 NICs on earnings up to the Upper Secondary Threshold for employees in these categories. The Employment Allowance would apply only to NICs above that threshold.
Planning across all available reliefs can create significant cost savings for employers.
How to Claim the Employment Allowance
You can claim the allowance via your payroll software or by using HMRC’s Basic PAYE Tools. The process is relatively simple:
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Tick the box in your software or online account to indicate that you wish to claim the allowance
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Submit an Employer Payment Summary (EPS) to HMRC
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The allowance will automatically be applied against your employer NICs until used in full or the tax year ends
You only need to claim once per year, but you should recheck eligibility each year — especially if your employment or group structure changes.
If you realise later in the year that you were eligible but didn’t claim, you can still claim retrospectively.
Claiming for Previous Years
You may also be able to backdate a claim for the previous four tax years, provided you met the eligibility criteria in each respective year.
- 2022/23 to 2024/25: The allowance was £5,000
- 2021/22: The allowance was £4,000
To make a backdated claim, you must apply separately to HMRC and adjust the relevant Employer Payment Summaries. HMRC may issue a refund or allow you to offset the amount against future liabilities.
Summary
The increase in Employment Allowance to £10,500 for 2025/26 presents a significant opportunity for qualifying employers to reduce their labour costs. However, understanding the eligibility rules, particularly around connected companies, directors-only businesses, and excluded sectors, is essential.
For eligible businesses, the allowance can free up valuable cash flow, support growth, and reduce the overall cost of employment.
Next Steps
If you’re unsure about your eligibility or how to make the most of the Employment Allowance. Speak with your accountant or payroll provider. At Merranti Accounting, we can assist you in reviewing your payroll structure, making a claim, or submitting a backdated application to recover missed relief.
For tailored advice, contact us today.
