Employment Allowance: Rates, Limits and Eligibility
Employment Allowance reduces an eligible employer's secondary Class 1 National Insurance bill by up to £10,500 a tax year [1], and with employer National Insurance charged at 15% on earnings above a £5,000 Secondary Threshold [2], that allowance covers the entire employer NI cost of roughly three and a half full-time employees paid at the National Living Wage.
The figure matters more than it used to. The allowance doubled from £5,000 to £10,500 with effect from April 2025, and the £100,000 secondary Class 1 liability cap that previously excluded larger employers was removed at the same time [3]. An employer that checked eligibility before that change and concluded it did not qualify may now qualify without anything about its own business having changed.
This article sets out the numbers in full: the current limit, how the allowance is consumed across a tax year, worked savings at different payroll sizes, the historic values, and the eligibility rules that decide whether an employer can claim at all. It also covers the two exclusions that catch the most businesses, single-director companies and connected companies, and what happens when the allowance is not fully used.
Key takeaways
- The maximum Employment Allowance is £10,500 for a tax year, set against employer secondary Class 1 National Insurance only [1].
- The allowance must be claimed every tax year through the Employment Allowance indicator on an Employer Payment Summary; it does not roll forward automatically [4].
- A limited company with one director who is the only employee liable for secondary Class 1 National Insurance cannot claim [5].
- Where two or more companies are connected at the start of a tax year, only one of them may claim [6].
- An employer whose National Insurance liability is below £10,500 keeps the benefit of the amount used, but cannot claim the difference as a refund [4].
- Claims can be made retrospectively for the previous four tax years [4].
The core figures
Employment Allowance is a relief against a single liability: employers' secondary Class 1 National Insurance. It does not touch income tax, employee National Insurance, Class 1A National Insurance on benefits in kind, or Construction Industry Scheme deductions [7].
| Parameter | Value |
|---|---|
| Maximum allowance per tax year | £10,500 |
| Liability it offsets | Employers' secondary Class 1 National Insurance |
| Employer NI rate the allowance offsets | 15% above the Secondary Threshold |
| Secondary Threshold | £5,000 a year (£417 a month, £96 a week) |
| Claim mechanism | Employment Allowance indicator on an Employer Payment Summary |
| Claim frequency | Once every tax year |
| Retrospective claim window | Previous four tax years |
The allowance is consumed as liability arises rather than granted as a lump sum. Each payrun, employer National Insurance is offset against the remaining balance until either the £10,500 is exhausted or the tax year ends, whichever comes first [1]. An employer with a large monthly National Insurance bill may therefore see the allowance disappear within the first quarter of the tax year, while a smaller employer spreads it across all twelve months.
What the allowance is worth in practice
The relief is worth its face value only where the employer's annual secondary Class 1 liability reaches £10,500. Below that point, the employer benefits by the amount of liability actually incurred [8]. The table below models three payroll shapes using the 15% rate and the £5,000 Secondary Threshold [2].
| Payroll | Secondary Class 1 liability | Allowance used | Net employer NI |
|---|---|---|---|
| 3 employees on £25,000 | £9,000 | £9,000 | £0 |
| 5 employees on £30,000 | £18,750 | £10,500 | £8,250 |
| 12 employees on £35,000 | £54,000 | £10,500 | £43,500 |
The three-employee business in the first row absorbs its entire employer National Insurance bill inside the allowance, but the £1,500 of unused allowance is not refundable [4]. This is the single most misunderstood feature of the relief and the reason it is worth more to a business at the top of the small-employer band than to one at the bottom.
The historic values
The allowance has risen five times since it was introduced on 6 April 2014. The trajectory matters because retrospective claims are assessed at the rate in force for the year claimed, not at the current rate [9].
| Period | Maximum allowance |
|---|---|
| From 6 April 2014 | £2,000 |
| From 6 April 2016 | £3,000 |
| From 6 April 2020 | £4,000 |
| From 6 April 2022 | £5,000 |
| From 6 April 2025 | £10,500 |
An employer making a four-year retrospective claim is therefore working with more than one figure across the claim period, and the eligibility test applied is the one that was in force at the time, including the £100,000 liability cap for years before April 2025 [9].
Who can claim
The base test is short. A business or public body can claim if it does less than half its work in the public sector, and charities including community amateur sports clubs can claim regardless of that test [3]. Individuals employing a care or support worker can also claim, which is a deliberate carve-out from the general exclusion of domestic employment [10].
Since April 2025 there is no upper limit on the employer's secondary Class 1 liability. The previous rule denied the allowance to any employer whose liability in the preceding tax year exceeded £100,000, and removing it brought large recruitment agencies, care providers and multi-site retailers back into scope [3].
Employees who cannot be counted
Two categories of worker are excluded from the calculation entirely. Earnings of a worker inside the off-payroll working rules do not count towards the liability that the allowance offsets [11]. Neither do the earnings of someone employed for personal, household or domestic work, unless that person is a carer or support worker [3].
The practical effect is that a company whose only payrolled workers sit inside the off-payroll rules has no qualifying liability and therefore nothing for the allowance to offset. Businesses running mixed populations of employees and deemed employees need their payroll to segregate the two before the allowance is applied, which is one of the calculations that HMRC-recognised payroll software handles at the category-letter level rather than by manual adjustment.
The single-director exclusion
The rule that catches the largest number of businesses concerns limited companies with a single director. Where a company has only one director and that director is the sole employee liable for secondary Class 1 National Insurance, the company cannot claim [5].
How the test actually works
The test is not about headcount, it is about who is liable for secondary Class 1 National Insurance. A company with a director and four other employees still fails the test if the director is the only person paid above the Secondary Threshold [12]. With the Secondary Threshold at £5,000 a year, that scenario is less common than it was, but part-time and seasonal payrolls can still fall below it.
Eligibility can be gained mid-year. If the company takes on at least one additional employee who is paid above the Secondary Threshold during the tax year, the company becomes eligible for the full amount of the allowance for that year, not a pro-rated share of it [5]. The exclusion applies only to limited companies, so a self-employed person operating unincorporated is not caught by it [12].
Two directors changes the answer
A company with two or more directors is outside the exclusion entirely, provided at least two of them are liable for secondary Class 1 National Insurance. This is a structural fact rather than a planning device, and HMRC's guidance on excluded persons frames the restriction as targeted at companies where the director is effectively the whole workforce [13]. Directors are in any case assessed for National Insurance on an annual earnings period, which changes the shape of their liability across the year regardless of the allowance.
Connected companies and connected charities
Where two or more companies are connected with each other at the start of a tax year, only one of them can claim Employment Allowance for that year, and the companies choose between themselves which one [6]. The same principle applies to connected charities [14].
What "connected" means
Companies are connected where one controls the other, or where both are under the control of the same person or persons [15]. Control is the same concept used for the Apprenticeship Levy, which is why the two reliefs are covered by a single set of HMRC connected-entity guidance [16].
Where the only link between two companies is the attribution of rights between associated persons such as relatives, the connection rule bites only if the companies are substantially commercially interdependent, meaning they support each other financially, share economic objectives, or share management, employees or premises [6]. Two companies owned by siblings that trade independently are not automatically connected [17].
The start-of-year snapshot
The connection test is taken at the start of the tax year and holds for the rest of it, whatever happens afterwards [6]. A group that breaks up in September is still a group for allowance purposes until the following 6 April.
The corollary works in the employer's favour. A subsidiary acquired or created after 6 April is treated as having no connected companies for the remainder of that tax year and can make its own claim [6]. Accountants tracking this across a client book usually flag it at acquisition rather than at year-end, and a multi-client payroll dashboard that surfaces the allowance status per scheme removes the need to check each one manually.
Multiple payrolls and unused allowance
An employer running more than one PAYE scheme can claim the allowance against only one of them [3]. HMRC's guidance is that the employer should choose the scheme with the largest secondary Class 1 liability, since the allowance cannot be split across schemes or transferred between them mid-year [18].
Where a claim is made late in the tax year and the allowance has not been fully absorbed, the employer asks HMRC to set the unused amount against other liabilities, which can include VAT and Corporation Tax where nothing is owed on the PAYE bill, or to refund it after the tax year ends [4]. Set-off and refund are the only two routes; there is no provision to carry an unused amount into another tax year [8]. The refund claim itself carries a four-year time limit running from the end of the tax year concerned [8].
Making and stopping the claim
The claim is made by setting the Employment Allowance indicator to 'Yes' on an Employer Payment Summary [19]. Claiming early in the tax year gets the benefit into cash flow sooner, and the amount used to date is visible in the employer's HMRC online account [4].
Stopping the claim is a separate action, and the guidance is explicit about two things that do not require it: reaching the £10,500 limit before the year ends does not make an employer ineligible, and ceasing to employ anyone does not either, because the allowance simply ends with the tax year [19]. An employer who stops a claim mid-year has the allowance already given removed and becomes liable for the secondary Class 1 National Insurance it covered [19].
Payroll platforms that submit the Employer Payment Summary automatically carry the indicator forward each April, which is the practical reason most employers never think about the annual re-claim. Platforms embedding UK payroll through an HMRC-recognised payroll API set the indicator as a scheme-level attribute so the claim persists across tax years without a manual step. Businesses issuing occasional payments outside a full scheme, using an instant payslip generator for example, sit outside the allowance mechanism entirely because there is no Employer Payment Summary to carry the claim.
Conclusion
Employment Allowance has changed character since the 15% employer National Insurance rate came in. At £10,500 against a £5,000 Secondary Threshold, it is no longer a marginal administrative footnote but a relief that can eliminate the employer National Insurance bill of a business with up to around three employees on average earnings, and materially reduce it well beyond that. The removal of the £100,000 cap widened the population of claimants further, which means the eligibility question is worth revisiting even by employers who previously concluded it did not apply to them.
The rules most likely to produce a wrong answer are structural rather than numerical: whether a company is connected to another at the start of the tax year, and whether the only person above the Secondary Threshold is a sole director. Both are facts about corporate shape rather than about payroll, which is why they are so often assessed once at incorporation and never revisited. As employer National Insurance continues to be the largest single payroll tax line for most UK businesses, the annual eligibility check is likely to move from an accountant's checklist into the payroll platform for SMEs itself.
Frequently asked questions
Can a company claim Employment Allowance if the director takes a salary below the Secondary Threshold?
If the director is paid below the Secondary Threshold, the director is not liable for secondary Class 1 National Insurance, so the question becomes whether anyone else in the company is. Where at least one other employee is paid above the Secondary Threshold, the company can claim [5]. Where nobody in the company is paid above it, there is no secondary Class 1 liability at all and the allowance has nothing to offset [8].
Does Employment Allowance reduce Class 1A National Insurance on benefits in kind?
No. The allowance is available only against employers' secondary Class 1 National Insurance arising on earnings [7]. Class 1A National Insurance on taxable benefits reported through P11D and P11D(b), and Class 1B on PAYE Settlement Agreements, fall outside it. Employers with large benefit populations should model the two liabilities separately.
What happens to the allowance if an employer takes on staff halfway through the tax year?
The full £10,500 remains available for that tax year, not a proportion of it. A company that was excluded because its sole director was the only person above the Secondary Threshold becomes eligible for the whole annual amount once a second qualifying employee is on the payroll [5]. The allowance then offsets liability as it arises from the point the claim is made [20].
How far back can an employer claim Employment Allowance it forgot to claim?
Claims can be made for the previous four tax years, and each year is assessed against the maximum allowance and the eligibility rules that were in force at the time rather than the current ones [9]. For years before April 2025 that includes the £100,000 secondary Class 1 liability cap, and in some cases the de minimis state aid rules requiring the employer to declare its business sector [19]. Retrospective refund claims carry a four-year time limit running from the end of the tax year concerned [8].
