Connected companies and the Employment Allowance
The Employment Allowance lets an eligible employer reduce its annual employer Class 1 National Insurance liability by up to £10,500 for the 2026-27 tax year [1]. Yet where two or more companies are connected at the start of that tax year, only one of them may claim the allowance, and the group has to decide between them [2].
Around 1,418,000 employers benefited from the Employment Allowance in the 2025 to 2026 tax year, a rise of 16% on the previous year after the £100,000 liability cap was removed [3]. Many of those employers sit inside groups, and for them the single most consequential rule is not eligibility, but the connected companies restriction that caps the whole group at one allowance.
This guide explains how HMRC decides whether two companies are connected, why the test bites at the start of the tax year, how control is measured, and how a group chooses which company should make the claim. It addresses employers and their agents, and reflects the rules for the 2026-27 tax year.
Key takeaways
- Where two or more companies are connected at the start of the tax year, only one company in the group can claim the Employment Allowance for that year [2].
- The allowance is worth up to £10,500 against employer Class 1 National Insurance for the 2026-27 tax year, and the group cannot multiply it by splitting across companies [1].
- Two companies are connected if one controls the other, or both are under the control of the same person or persons [2].
- Connection is tested at the start of the tax year and, once established, holds for the whole year regardless of later changes [2].
- The rule applies only to companies, not to sole traders, partnerships, or a standalone single company [2].
What the Employment Allowance is worth in 2026-27
The Employment Allowance reduces an eligible employer's secondary Class 1 National Insurance liability by up to £10,500 in the 2026-27 tax year [1]. The relief is applied each time payroll runs, offsetting the employer National Insurance due until the £10,500 is used up or the tax year ends, whichever comes first [1].
The value of the allowance has grown sharply. It began at £2,000 in April 2014, rose to £3,000 in April 2016, £4,000 in April 2020, £5,000 in April 2022, and then more than doubled to £10,500 from 6 April 2025 [3]. That last increase landed alongside two other changes to employer National Insurance: the secondary threshold fell from £9,100 to £5,000, and the rate rose from 13.8% to 15% [3]. Employer National Insurance is charged at 15% on earnings above the £5,000 secondary threshold for the 2026-27 tax year [4], a change explained in more depth in this guide to employer National Insurance.
For a group of companies, the arithmetic matters. The allowance is worth £10,500 to a single eligible employer, but it is worth £10,500 to the group as a whole, not £10,500 per company. Understanding the connected companies rule is therefore worth up to £10,500 in avoided error, because a group that wrongly claims the allowance against more than one company faces recovery of the excess. Modern UK payroll software applies the allowance automatically once a claim is set, but the decision about which company claims sits with the group, not the software.
The connected companies rule
The connected companies rule is the mechanism that stops a group from claiming the allowance more than once. If, at the start of the tax year, two or more companies are connected with each other, only one of those companies can qualify for the Employment Allowance for that tax year, and it is up to the companies to decide which one will claim [2]. The restriction reflects the policy intent of the allowance, which is to support employment costs across a single economic undertaking rather than to reward a group for the number of legal entities it holds [5].
The rule is narrow in one important respect. It applies only to companies. It does not apply to sole traders, partnerships, or a single company that is not connected to any other [2]. A person who runs several unincorporated businesses is not caught by the connected companies rule, although separate rules on multiple payrolls still apply [6]. This makes the allowance simpler for many owner-managed businesses running payroll for a small company, where a single entity claims without any group analysis.
How HMRC defines connected
The basic test for whether two companies are connected is that either one of them has control of the other, or both are under the control of the same person or persons [2]. Where the parties involved are companies linked in a group, for example a parent company and its subsidiaries, those companies are connected [6].
Connection does not have to be direct. Companies can be connected through a third company [7]. If company A is connected with company B, and company B is connected with company C, that is enough to make companies A and C connected with each other for Employment Allowance purposes [7]. A group therefore has to look across the whole chain of ownership, not just the immediate shareholder of each company.
Why the test is applied at the start of the tax year
The connection test is a snapshot taken on 6 April, the first day of the tax year. If, at the start of the tax year, two or more companies are connected, they are treated as connected for Employment Allowance purposes for the remainder of that tax year, regardless of any later change of circumstance [2]. A group that breaks up mid-year does not gain a second allowance for the companies that separate, because the connection was fixed on 6 April [7].
The reverse also holds, and it is more useful. A company that is created or acquired after 6 April is not treated as having any connected companies for the rest of that tax year, so it can make its own claim in the year of acquisition [2]. The following tax year, the new company is caught by the connected persons rule and can only claim if no other company in the group claims [2]. Agents who manage several group clients through a multi-client payroll dashboard usually record the 6 April position for each group so the claim is set against the right entity from the first payrun.
Working out control
Because connection turns on control, the practical question for most groups is how control is measured. Control can be demonstrated through any of several rights, and holding the greater part of any one of them is enough [2]. The table below sets out the main features HMRC considers.
| Feature of control | What it means | Threshold for control |
|---|---|---|
| Voting power | Rights to vote at general meetings | Greater part (over 50%) [[2]](https://www.gov.uk/government/publications/employment-allowance-more-detailed-guidance/connected-companies-and-employment-allowance-further-guidance-for-employers-and-their-agents) |
| Share capital | Ownership of issued shares | Greater part (over 50%) [[2]](https://www.gov.uk/government/publications/employment-allowance-more-detailed-guidance/connected-companies-and-employment-allowance-further-guidance-for-employers-and-their-agents) |
| Rights to income | Entitlement to distributed income | Greater part [[2]](https://www.gov.uk/government/publications/employment-allowance-more-detailed-guidance/connected-companies-and-employment-allowance-further-guidance-for-employers-and-their-agents) |
| Rights on a winding up | Entitlement to surplus assets if the company is wound up | Greater part [[2]](https://www.gov.uk/government/publications/employment-allowance-more-detailed-guidance/connected-companies-and-employment-allowance-further-guidance-for-employers-and-their-agents) |
If at the start of the tax year a person holds the majority, meaning over 50%, of the share capital or voting rights in more than one company, those companies are connected, that person has control, and only one of the companies is entitled to the allowance [2]. The group then has to decide which company claims [6]. Beyond these primary tests, HMRC also considers fixed rate preference shares, the minimum controlling combination principle, loan creditors, and trustees, each of which can affect whether control exists [2].
Substantial commercial interdependence
A softer test applies where two companies are connected only because rights in them are attributed between certain associated persons, such as relatives [2]. In that situation, the companies are treated as connected for Employment Allowance purposes only if there is substantial commercial interdependence between them [2]. This matters for family businesses, where a husband might control one company and a wife another. Without commercial interdependence, the two are not automatically connected simply because the owners are related [5].
HMRC assesses interdependence across three dimensions: financial, economic, and organisational [2]. The three are considered together, and a strong link in one area can be enough to establish interdependence [5].
Financial interdependence
Two companies are financially interdependent if either one gives financial support, directly or indirectly, to the other, or each has a financial interest in the affairs of the same business [2]. A loan from one family company to another, or a shared stake in a joint venture, points towards financial interdependence [5].
Economic interdependence
Two companies are economically interdependent if they look to realise the same economic goal, if the activities of one benefit the other, or if they have common customers [2]. A supplier company and a retail company owned by relatives, selling to the same customer base, would tend to be economically interdependent [5].
Organisational interdependence
Two companies are organisationally interdependent if they use common management, employees, premises, or equipment [2]. Shared payroll staff, a shared office, or a single management team running both companies each point towards organisational interdependence [7].
Which company should claim
Once a group establishes that its companies are connected, it must nominate a single company to claim the allowance, and HMRC leaves that choice to the group [2]. The sensible choice is usually the company with the largest employer Class 1 National Insurance liability, because the allowance is only useful up to the amount of that liability. A company with a £4,000 employer National Insurance bill can only absorb £4,000 of the £10,500 allowance, and an incorporated business cannot transfer the unused balance to another company in the group [2].
Consider a group of three companies at 6 April, all under common control. Company A has an employer National Insurance liability of £3,000 for the year, company B £9,000, and company C £14,000. If the group sets the claim against company A, it recovers only £3,000 and loses the remaining £7,500 of relief, because the balance cannot move to B or C [2]. Setting the claim against company C, whose £14,000 liability comfortably exceeds the allowance, captures the full £10,500 [1]. The choice of claiming company is therefore worth up to £7,500 to this group in this example.
The claim itself is made through the Employer Payment Summary, by putting Yes in the Employment Allowance indicator field, and it must be renewed once each tax year [8]. Groups that run multiple entities through a single payroll bureau platform can align the claim with the highest-liability company at the start of each year as part of the year-end rollover.
Multiple PAYE schemes and unused allowance
A related restriction applies where a single employer runs more than one PAYE scheme. An employer can only claim the Employment Allowance against one PAYE scheme, and if it is responsible for more than one, it must decide which scheme to set the claim against [2]. This is distinct from the connected companies rule, but it points the same way: the allowance attaches to one place, and the employer chooses where.
Whether unused allowance can be redirected depends on how the business is structured, as the table shows.
| Business type | Can unused allowance move to another PAYE scheme? |
|---|---|
| Incorporated (limited company) | No. The remainder of the allowance cannot be claimed against another scheme [[2]](https://www.gov.uk/government/publications/employment-allowance-more-detailed-guidance/connected-companies-and-employment-allowance-further-guidance-for-employers-and-their-agents) |
| Unincorporated (sole trader) | Yes. The remainder can be set against another scheme after the tax year ends, on request [[2]](https://www.gov.uk/government/publications/employment-allowance-more-detailed-guidance/connected-companies-and-employment-allowance-further-guidance-for-employers-and-their-agents) |
The difference reinforces the point that, for groups of limited companies, the choice of claiming company is final for the year. There is no mechanism to sweep the unused portion into a sister company at year end [2]. Software platforms that embed payroll compliance through a UK payroll API can flag the single-scheme constraint at the point a group tries to set a second claim.
Special cases HMRC recognises
Several less common situations affect whether companies are connected, and they usually surface in groups with outside investors or trust structures.
New subsidiaries acquired mid-year
At 6 April, where a parent company has several subsidiaries, the group identifies which one company will claim [2]. A subsidiary acquired or created after 6 April is not treated as connected for the remainder of that tax year and can make its own claim, before falling under the connected rule from the next 6 April [2]. A group that acquires a trading subsidiary in, for example, June can therefore benefit from a second allowance in that first year, which is a genuine but time-limited feature of the rules [7].
Fixed rate preference shares
Certain financial institutions, such as venture capital funds, provide finance by taking preference shares rather than making loans [2]. Fixed rate preference shares are disregarded when deciding control if the holder is not a close company, takes no part in the management or conduct of the issuing company, and subscribed for the shares in the ordinary course of a business that includes providing finance [2]. This prevents an outside investor's shareholding from artificially connecting two companies in its portfolio [7].
Minimum controlling combination, loan creditors, and trustees
The minimum controlling combination principle means only the smallest group of persons that has control is considered when testing connection, and combinations containing unnecessary members are ignored [2]. Two companies are only under the control of the same persons if the group controlling one is identical to the group controlling the other, and that group is a minimum controlling combination for each company [2]. The same connection principles also govern the single £15,000 allowance shared across a group under the Apprenticeship Levy, so groups often resolve both questions at the same time. Separately, a loan creditor is disregarded when deciding control if there is no other connection and the loan was made in the ordinary course of business, and rights held in trust by a solicitor or bank trustee are ignored where there is no other connection between the companies [2].
Conclusion
The connected companies rule reframes the Employment Allowance for anyone running a group. The headline figure of £10,500 is not a per-company entitlement but a single allowance shared across every company connected on 6 April, and the group's job is to place it where it does the most work [2]. Because the connection test is a snapshot taken at the start of the tax year and holds for the whole year, the decision about which company claims has to be made early and recorded clearly [7].
With employer National Insurance now charged at 15% above a £5,000 threshold, the allowance is worth more than at any point in its history, and so is the cost of getting the group position wrong [3]. For accountants and finance teams, the discipline is annual: confirm the 6 April structure, identify the connected set, and set the single claim against the company that can absorb the full amount.
Frequently asked questions
Can two companies owned by the same person both claim the Employment Allowance?
No. If one person holds the majority of the share capital or voting rights in more than one company at the start of the tax year, those companies are connected and only one of them can claim the Employment Allowance for that year [2]. The owner chooses which company makes the claim, and the allowance is capped at £10,500 for the group as a whole [1].
Are companies owned by different family members automatically connected?
Not automatically. Where two companies are connected only because rights are attributed between relatives, they are treated as connected for Employment Allowance purposes only if there is substantial commercial interdependence between them [2]. HMRC looks at whether the companies are financially, economically, and organisationally interdependent before treating them as one for the allowance [5].
What happens to the Employment Allowance if a group buys a new company mid-year?
A company acquired or created after 6 April is not treated as having any connected companies for the remainder of that tax year, so it can make its own Employment Allowance claim in the year of acquisition [2]. From the following 6 April it is caught by the connected companies rule and can only claim if no other company in the group claims [7].
Does the connected companies rule apply to sole traders and partnerships?
No. The connected companies rule applies only to companies. It does not apply to sole traders, partnerships, or a single standalone company [2]. A person running several unincorporated businesses is not caught by the connection test, although the separate rule limiting the allowance to one PAYE scheme still applies [6].
