Employment Allowance explained: is your business claiming it?

What is the Employment Allowance?

The Employment Allowance is a government relief that reduces an eligible employer's Class 1 National Insurance liability — the National Insurance you, as the employer, pay on top of your staff's wages, not the National Insurance deducted from their pay. From April 2025 it is worth up to £10,500 per tax year, taken off your employer NIC bill as you run payroll rather than paid out as a lump sum. It is not a grant you apply for separately; it is a claim made through your payroll software's Employer Payment Summary (EPS), submitted alongside your regular RTI reports to HMRC. Once claimed, the allowance is used up automatically as your employer NI liability accrues each pay period, until either the full £10,500 is used or the tax year ends. GOV.UK's guidance on what you'll get from the Employment Allowance confirms this as the current 2025/26 figure, up from £5,000 in previous years.

Because it comes straight off what you owe HMRC, for smaller employers it can wipe out a substantial share of the employer NI bill — in some cases all of it. A business with modest headcount might find its entire employer NI liability for the year absorbed by the allowance, effectively making its first several employees free of employer National Insurance altogether.

Who is eligible?

Most businesses and charities that pay employer Class 1 National Insurance on employees' wages can claim the Employment Allowance, and HMRC's eligibility guidance sets out only a handful of exclusions to check before you tick the claim box. The allowance is aimed at small and medium-sized employers, though as covered below, size is no longer the barrier it once was. To claim, your business must be a limited company, sole trader, partnership or charity that employs staff and incurs a secondary Class 1 NIC liability. The groups who need to check their position carefully before assuming they qualify are single-director companies with no other staff, companies connected to other companies under common control, and certain employers whose work is mostly for the public sector. Get any of these wrong and you risk either an ineligible claim HMRC will later claw back, or missing out on money you were entitled to.

• Single-director companies with no other staff: if your company has only one director, and that director is also the only employee liable for secondary Class 1 National Insurance, you can't claim. HMRC's guidance states it plainly — "If your company has only one director, they must not be the only employee liable for secondary Class 1 National Insurance."
• Connected companies (under common control) share a single allowance between them — only one company in the group can claim it, even if several group companies each run their own PAYE scheme.
• Certain public-sector employers and businesses doing most of their work in the public sector.

The £100,000 cap has been removed — and other edge cases

Until the 2024/25 tax year, employers whose total employer Class 1 National Insurance liability exceeded £100,000 in the previous tax year were barred from claiming the Employment Allowance altogether, regardless of headcount. That restriction is gone. GOV.UK's rates and thresholds guidance for 2025/26 confirms that employers paying more than £100,000 in Class 1 National Insurance liabilities can now apply for the Employment Allowance — a significant change that opens the relief to a wider range of growing and mid-sized businesses that previously, correctly, assumed they didn't qualify. If your business crossed that £100,000 threshold in recent years and stopped checking your eligibility as a result, this is worth revisiting now, because the door that was closed is open again, and combined with the higher £10,500 allowance, it's worth claiming even if you dismissed it a few years ago.

A related edge case: if your business structure changes mid-year — a new subsidiary is set up, a company is acquired, or two previously separate businesses become connected under common ownership — the connected companies rule means the group must agree which single company will claim the allowance for that tax year. Leaving this unresolved, or having two connected companies both claim, is a common trigger for an HMRC compliance check, so any restructuring event should prompt an immediate review of which entity holds the claim.

Why do so many businesses miss it?

In our payroll reviews, the same causes come up again and again. The claim box was never ticked in the payroll software when the company was first set up, so the allowance simply never started. The business switched payroll provider partway through a tax year and the claim didn't carry over automatically — the new system started from a blank slate and nobody re-ticked it. Nobody re-checked eligibility after the rules changed, so a business that correctly sat outside the allowance under the old £100,000 cap never went back to see whether the removal of that cap now lets it in. Or a group of connected companies claimed on the wrong entity, or on more than one, without realising only one claim is valid. The result is the same in every case — money left with HMRC that the business was entitled to keep, quietly accumulating year after year until someone finally checks the payroll history.

Common mistakes that cost employers money

Beyond simply forgetting to claim, we see a recurring set of avoidable errors that either delay a claim, invalidate it, or leave money unclaimed year after year. Most come down to a claim being made once, when the payroll was first set up, and never revisited as the business's circumstances change — a new employee joins, a company structure shifts, or the rules themselves are updated by HMRC. Because the Employment Allowance is claimed through a single tick-box on an Employer Payment Summary rather than reassessed automatically, nothing forces a business to check its eligibility again unless someone actively does so. The result is that genuinely eligible employers can go years without claiming, or without noticing that a change which used to disqualify them, like the old £100,000 NIC cap, no longer applies. Checking each of the following against your own payroll takes minutes and can be worth thousands of pounds, both in the current tax year and in backdated claims for years already gone by.

• Assuming a single-director company is permanently excluded, when hiring a second employee later in the year can make the company eligible from that point onward.
• Not re-ticking the Employment Allowance claim after switching payroll software or bureau, so the new system runs a full tax year without it.
• Claiming on the wrong company within a connected group, or claiming on more than one connected company at the same time.
• Never revisiting eligibility after the £100,000 employer NIC cap was removed from April 2025, on the assumption the business is still excluded.
• Failing to claim for previous years the business was eligible but didn't claim, and letting the four-year backdating window run out unused.

Worked example: what £10,500 looks like on a real payroll

Take a small business running payroll for eight staff, generating an employer Class 1 National Insurance bill of roughly £14,000 for the 2025/26 tax year before any relief is applied. Once the Employment Allowance is correctly claimed via the Employer Payment Summary, £10,500 of that bill — the full 2025/26 allowance — is deducted directly from what's owed to HMRC as payroll runs through the year, month by month, until the allowance is used up. That leaves the business paying only around £3,500 in employer NIC for the whole tax year, rather than £14,000. For a business that size, that's not a rounding error — it's the difference that can fund a pay rise, cover a new hire's onboarding costs, or simply improve cash flow every month the payroll runs, because the saving lands throughout the year rather than as a single refund at the end.

Now suppose this same business was eligible but never claimed in the three tax years before 2025/26. Under HMRC's rules on claiming for previous years, it can go back and claim for 2022/23, 2023/24 and 2024/25, each of which carried an allowance of £5,000. That's a further £15,000 across three years, on top of the £10,500 available for the current year — a total of £25,500 recovered from a claim the business assumed it had already made. This is exactly the kind of gap our free payroll reviews are designed to catch: eligibility that was always there, simply never claimed.

Can you backdate a claim?

Yes. If you were eligible in earlier years and didn't claim, HMRC's guidance on claiming the Employment Allowance for previous years confirms you can normally go back and claim for up to four previous tax years, provided you were eligible in each of those years. For a business checking its position during 2025/26, that reaches back to cover 2022/23, 2023/24 and 2024/25 — each carrying an allowance of £5,000 — as well as the current year's £10,500. That means a business that has simply never claimed, whether because nobody ticked the box when the payroll was first set up or because a change of provider quietly dropped the claim, could be owed a genuinely significant refund spanning several tax years. It's one of the first things we check in every free payroll review, precisely because it's so easy to overlook and so straightforward to fix once spotted.

How PayrollSmart makes sure you get 100% of it

We review your claim status as a standard part of onboarding every new client, verify eligibility against the current rules — including the connected companies test and the now-removed £100,000 cap — and correct the current year's claim if it's missing or wrong. Where a business has been eligible but hasn't claimed in prior years, we identify exactly which tax years qualify and submit the backdated claim, so nothing within the four-year window is left unclaimed. This isn't a one-off check: it's built into every payroll we run, alongside RTI submissions, payslips, P60s and pension uploads, so the allowance is checked every tax year, not just the year you switch to us. If your circumstances change — a new hire takes you outside the single-director exclusion, or a group restructure changes which company should be claiming — we catch it as part of running your payroll, not months later when it's too late to fix cleanly.

How much is the Employment Allowance worth?

Up to £10,500 per tax year from April 2025 (it was £5,000 before that). It reduces your employer Class 1 National Insurance bill directly, as payroll is run, rather than being paid out as a separate lump sum.

Can I backdate an Employment Allowance claim?

Yes — you can normally claim for up to four previous tax years if you were eligible, which for a business checking its position now could mean 2022/23 through 2024/25 at £5,000 each, plus the current year's £10,500.

How do I know if my business is eligible?

Most employers who pay Class 1 NICs on staff wages qualify, but single-director companies and connected company groups need checking carefully. A free payroll review will confirm your position.

Does the £100,000 employer NIC cap still stop larger businesses claiming?

No. From April 2025, GOV.UK confirms this cap has been removed, so employers who previously paid over £100,000 in employer Class 1 National Insurance and were excluded can now apply for the Employment Allowance.

We run several connected companies with separate PAYE schemes — can each one claim?

No. Connected companies under common control share one Employment Allowance between them, so only a single company or PAYE scheme in the group can claim it, even if the others each run their own payroll.