Understanding the Employment Allowance and Its Impact on Employers in 2025/26
The Employment Allowance is a key National Insurance (NI) allowance that eligible employers can use to reduce their secondary Class 1 National Insurance contributions (NICs) liability. This allowance has been particularly beneficial for smaller businesses, offering them much-needed cash flow relief. However, from 6 April 2025, significant changes to the secondary Class 1 NICs rate and thresholds have prompted adjustments to the Employment Allowance. This article outlines the changes, the eligibility criteria, and how employers can benefit from the allowance.
What is the Employment Allowance?
The Employment Allowance provides a way for employers to reduce their secondary Class 1 NICs liability, which is the employer’s contribution to National Insurance. For 2025/26, the allowance is set at £10,500, significantly increased from £5,000 in previous years. This increase is aimed at helping mitigate the impact of changes to secondary Class 1 NICs rates and thresholds, making it a valuable tool for eligible employers.
- Eligible employers can set the Employment Allowance against their secondary Class 1 NICs liability, meaning they won’t need to pay any NICs until the allowance is used up.
- If the employer’s secondary Class 1 NICs liability is less than £10,500, the allowance will fully offset the liability. In such cases, eligible employers won’t need to pay any secondary Class 1 NICs during the year.
- The allowance can only be used against secondary Class 1 NICs, and it cannot be set against other employer liabilities such as Class 1A or Class 1B NICs, nor can it be carried over to the next tax year.
How Has the Employment Allowance Changed for 2025/26?
Starting from 6 April 2025, several important changes will impact employers’ secondary Class 1 NICs:
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Secondary Class 1 NICs Rate: The rate has increased from 13.8% to 15% for 2025/26.
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Secondary Class 1 NICs Threshold: The threshold at which secondary Class 1 NICs become payable has decreased from £9,100 to £5,000 annually, which translates to £96 per week or £417 per month.
To help offset the burden of these changes, the Employment Allowance has been increased to £10,500 for the 2025/26 tax year, and its availability has also been widened. Previously, employers with a secondary Class 1 NICs liability of £100,000 or more in the previous tax year were excluded from claiming the Employment Allowance. However, for 2025/26, even employers with a Class 1 NICs bill of £100,000 or more are now eligible for the allowance.
How Does the Employment Allowance Benefit Employers?
The Employment Allowance provides a cash flow benefit for employers by allowing them to offset their NICs liability at the start of the tax year. Here’s how the allowance can benefit two types of employers:
Example 1: A Small Business (A Ltd)
A Ltd is a family company with two employees, each paid £1,040 per month. For 2025/26, the company’s secondary Class 1 NICs liability for each employee would amount to £93.45 per month, or £2,242.80 annually (12 x £186.90). Since the total secondary Class 1 NICs liability of £2,242.80 is less than the £10,500 Employment Allowance, A Ltd will not have to pay any secondary Class 1 NICs for the entire year.
Example 2: Employment Allowance Used in Full (B Ltd)
B Ltd is a larger company with a £2,450 monthly secondary Class 1 NICs liability in 2024/25. Over the first four months of the 2025/26 tax year, B Ltd uses £9,800 of the Employment Allowance (4 x £2,450), so it has no NICs liability to pay during these months. The remaining £700 of the allowance is applied against the NICs liability in month 5, reducing it to £1,750. After this, B Ltd must pay the full £2,450 monthly NICs liability for the remaining seven months of the year.
Excluded Employers
It’s important to note that the Employment Allowance is not available to all employers. The main category of excluded employers is:
- Companies with only one employee, where that employee is a director. Many personal companies fall into this exclusion and will not be able to benefit from the Employment Allowance.
To qualify for the Employment Allowance, the employer must be the secondary contributor for at least one employee and must be liable for secondary Class 1 NICs.
Summary of Key Changes for 2025/26
| Change | Before 6 April 2025 | From 6 April 2025 |
|---|---|---|
| Secondary NICs rate | 13.8% | 15% |
| Secondary Class 1 NICs threshold | £9,100 annually (£175 per week) | £5,000 annually (£96 per week) |
| Employment Allowance | £5,000 annually | £10,500 annually |
| Eligibility | Employers with a Class 1 NICs bill of £100,000+ excluded | Employers with a Class 1 NICs bill of £100,000+ eligible |
Conclusion
The Employment Allowance offers significant tax relief for eligible employers, particularly small businesses, by reducing their secondary Class 1 NICs liability. The increase in the allowance to £10,500 for 2025/26 and the expansion of eligibility to employers with a NICs bill of £100,000 or more provides further opportunities for cash flow relief.
Employers should assess their NICs liability, eligibility for the allowance, and how the allowance can be used to offset their liability. It’s also important to be aware of the changes to secondary Class 1 NICs rates and thresholds that will impact businesses in 2025/26.
For guidance on how the Employment Allowance can benefit your business or help with tax planning strategies. Contact Merranti Accounting for personalized advice and expert assistance in maximizing tax relief.
