Is your small business eligible for Employment Allowance in 2026/27?

If you run a small business and employ staff, you may be eligible to claim Employment Allowance from HMRC. This would allow you to reduce your employer National Insurance bill by up to £10,500 per year – helping free up cash to invest back into your business or boost your profits.

However, not every business qualifies. There are several eligibility rules, and some employers are excluded altogether, such as single-director companies with no other employees.

This guide explains everything you need to know about Employment Allowance, including who can and cannot claim it, how much you can save on your National Insurance bill, and how to submit a claim to HMRC.

What is Employment Allowance?

Employment Allowance is a government relief scheme that allows eligible employers to reduce their secondary Class 1 National Insurance contributions (NIC) on employees’ wages.

Rather than paying the full amount of secondary (employer) National Insurance, qualifying businesses can offset all or part of their liability against the allowance.

Employers become liable for secondary Class 1 NIC when an employee’s earnings exceed £5,000 per year (the NIC Secondary Threshold). For the 2026-27 tax year, the rate of employer National Insurance is 15% on an employee’s earnings above the threshold.

Employment Allowance only reduces the secondary Class 1 NIC liabilities shown on your payroll scheme’s Full Payment Submission (FPS). You cannot use it to reduce:

• Employer’s Class 1A or Class 1B NIC
• Primary (employees’) NIC
• Income Tax deductions
• Student Loan repayments
• Pension contributions
• Apprenticeship Levy payments

You need to claim the allowance through your payroll software (or HMRC’s Basic PAYE Tools) every tax year. The allowance is then offset against your employer NIC liabilities each pay period, as they arise. You will continue to receive the allowance until the full amount has been used or the tax year ends (whichever is sooner).

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How much is Employment Allowance?

For the 2026-27 tax year, eligible businesses can claim up to £10,500 Employment Allowance. This is the same amount as the previous year.

The annual allowance is available per employer, not per employee or per payroll scheme. So, regardless of how many people you employ or how many payroll schemes you run, you can only claim one Employment Allowance per year for each eligible business.

Each pay period, the allowance is set against your full secondary Class 1 NIC liability for that period, until you reach the £10,500 annual limit.

If you use the full allowance before the end of the tax year, you are responsible for paying any additional secondary Class 1 NIC liabilities that arise.

For example, an employer with four staff each earning £22,500 a year would pay £2,625 of employer NI per employee ((£22,500 – £5,000) × 15%), or £10,500 in total. Employment Allowance would cover that bill in full.

Who can claim Employment Allowance?

Most UK businesses can claim Employment Allowance if they have employees and are liable for secondary Class 1 NIC. This includes:

• Limited companies
• Sole traders
• Partnerships
• Charities
• Community Amateur Sports Clubs (CASCs)
• Anyone who employs a care or support worker (e.g., to care for someone with a disability or illness)
• Franchises

The following eligibility requirements apply:

• You’re registered as an employer with HMRC.
• At least one employee earns above the NIC Secondary Threshold.
• If you operate a company, the director must not be the only employee liable for secondary Class 1 NIC.
• No more than half of your work is in the public sector (e.g., for local councils or NHS services) – unless you’re a charity.

Excluded employees

You cannot include the following types of employees in any claim for Employment Allowance:

• Domestic worker – a person you employ for personal, household, or domestic work (e.g., a nanny, au pair, cleaner, chauffeur, or gardener), unless they are a carer or support worker.
• IR35 worker – any person whose secondary Class 1 NIC liabilities arise from off-payroll engagements caught by IR35 rules.

Single-director companies

Single-director companies don’t qualify for Employment Allowance if the director is the only employee earning above the NIC Secondary Threshold.

However, a company may be eligible to claim up to the full allowance in a tax year if it has at least:

• Two directors who both earn above the Secondary Threshold.
• One employee who is not a director and who earns above the Secondary Threshold.
• One temporary or seasonal worker who earns above the Secondary Threshold in a pay period.

If a company’s circumstances change during the tax year and the sole director becomes the only employee earning above the Secondary Threshold, the company can continue claiming Employment Allowance for the rest of that tax year.

This means that the allowance can be set against any secondary Class 1 NIC liability arising on the sole director’s salary until the full allowance has been used, or the tax year has ended (whichever is sooner).

If you’re part of a group or have more than one PAYE scheme

If you have a group of companies or charities, HMRC treats them as connected companies for Employment Allowance purposes. This means that you can only claim the allowance for one company or charity in the group in a tax year.

Two or more companies are ‘connected’ with each other if either:

• One company has control over the other.
• Both companies are under the control of the same person or persons.

Similarly, employers with more than one payroll for different parts of their business can only claim the allowance against one PAYE scheme in a tax year.

How to claim Employment Allowance

Employment Allowance is not awarded automatically. You need to claim it every tax year, either through HMRC-recognised payroll software or HMRC’s Basic PAYE Tools.

Using HMRC-recognised software

To claim the allowance using HMRC-recognised payroll software, simply enter ‘Yes’ in the ‘Employment Allowance indicator’ field when you file your next Employer Payment Summary (EPS) with HMRC.

If your software doesn’t have an Employment Allowance indicator field, you’ll need to use HMRC’s Basic PAYE Tools instead.

Using HMRC’s Basic PAYE Tools

To claim the allowance using HMRC’s Basic PAYE Tools:

1. Click on your business name in the ‘Employer’ menu on the home page.
2. Select ‘Employment Allowance’.
3. Review the eligibility criteria to ensure you qualify.
4. File your Employer Payment Summary with HMRC as normal.

You can use Basic PAYE Tools to claim the allowance even if you run payroll through other software.

If you use this tool to claim Employment Allowance while continuing to use your own software to run payroll, you must keep a record of the allowance you use throughout each tax year.

Claiming Employment Allowance for previous tax years

You may be eligible to claim the allowance for the four previous tax years if:

• You are a business, charity, or Community Amateur Sports Club.
• You employ a care or support worker.

If you’re claiming for the 2024-25 tax year or earlier, your secondary Class 1 NIC bill for the previous tax year must have been less than £100,000. No such limit applies if you’re claiming for the 2025-26 tax year or later.

When to claim Employment Allowance

You can claim Employment Allowance at any time during the tax year, provided that your business or charity incurs employer Class 1 NIC liabilities and meets the eligibility criteria. However, claiming as early as possible in any new tax year will allow you to start reducing your employer NIC liabilities as soon as they arise.

If you claim late and don’t use your full Employment Allowance for the tax year, you can ask HMRC to:

• Use the unclaimed allowance to pay any tax or National Insurance you owe (including Corporation Tax and VAT), or
• Issue a refund after the end of the tax year

However, the allowance can only ever cover your actual secondary Class 1 NIC liability – HMRC won’t refund any allowance above that amount.

You can keep track of how much Employment Allowance you’re using throughout the year by signing in to your HMRC business tax account.

Thanks for reading

Employment Allowance provides valuable relief to eligible UK businesses, particularly small employers operating on tight budgets. Claiming this allowance will help you reduce employment costs, improve cash flow, and grow your business.

If you require further guidance on Employment Allowance or other cost-saving measures, we recommend speaking to an accountant for expert, tailored advice. To set up your company, explore Rapid Formations.

Please comment below if you have any questions about this post. You can also explore the Rapid Formations Blog for comprehensive guides on setting up and running a UK limited company.