Quick answer
Employment Allowance can reduce an eligible employer’s Employer’s National Insurance bill by up to £10,500, but the rules are not always straightforward. Connected companies, sole director companies, excluded workers and business changes can all affect whether a claim is available.
Employment Allowance sounds great, and on paper it is – after all, who wouldn’t want relief of upto £10,500 from the government? However, while the eligibility criteria is short and sweet, the list of exemptions is lengthy and often convoluted.
We’ll cover what Employment Allowance really is and how it works, how you can claim it, and what might stop you receiving it.
01
Worth up to £10,500.
The allowance is used against Employer’s NI rather than paid as cash.
02
Claimed through payroll.
Claims are made through payroll software using an Employer Payment Summary.
03
Exclusions matter.
Groups, married partners, sole directors and certain employees can complicate claims.
What is Employment Allowance?
Employment Allowance is a government scheme allowing eligible employers to offset up to £10,500 against their annual Employer’s National Insurance bill. It is claimed against your NI bill and is not given as a direct cash payment – the £10,500 is fixed and applies per company, not employee.
Previously set at £5,000 annually, Employment Allowance more than doubled in the 2024 Autumn Budget in order to ease the blow of the changes to Employer’s NI, with both a percentage increase to the rates and the threshold drop substantially, which together increased costs to employers.
In addition to this, employers with an Employers NI bill over £100,000 per year now became eligible to claim, as the restriction preventing this had been lifted.
Why employers need to check before claiming.
The allowance can be valuable, but the exclusions are where many businesses get caught out. A claim that looks obvious at first may need a closer look where there are connected companies, multiple businesses, family ownership or a sole director company.
Who is eligible?
There are two main criteria for eligibility:
- You must be a business or public body who does less than half their work in the public sector.
- If the company only has one director, they must not be the only director/employee liable for Employer NI.
These are HMRC’s words – in layman’s terms, unless you do more than half your work within the public sector you simply need to employ more than one employee/director earning enough to pay Employer’s NI – so annual earnings of over £5,000; the new rate that ER NI is payable from.
What disqualifies you from claiming Employment Allowance?
The eligibility list is nice and simple, right? Unfortunately, what sounds pretty wide ranging doesn’t actually translate to everyone being able to claim, as the exemptions list is extensive.
Certain employees cannot be used to claim Employment Allowance, such as those whose earnings fall within IR35 ‘off payroll working rules’ and someone who is employed for personal, household or domestic work.
Groups of companies and charities also suffer when trying to claim employment allowance, as do married partners.
Connected companies and charities.
This is often where the practical complications sit, especially for businesses with shared ownership, shared directors or multiple companies under the same control.
The basic rule for defining connected companies and charities is that either one has control of the other, or both are under the control of the same person or persons. Features of control as considered by HMRC can be the split of voting power, share capital and “substantial commercial interdependence” – financial, economic and organisational. You may be familiar with this as this follows the same approach as “associated companies” rules which are used to determine the rate of corporation tax that is payable for small businesses.
Financial and economic interdependence are easy to define – one or more of the companies are financially dependent on another. Organisational can appear a bit more confusing; should the companies share one or more directors, they are defined as organisationally interdependent.
It is often the case that married partners running multiple businesses are connected through substantial commercial interdependence, be that organisational or financial – if you are both directors on one or more of the companies, this would mean only one company in the group can claim Employment Allowance.
More importantly however, an often-overlooked rule is how HMRC treat married partners. Under HMRC’s own rules, married partners are considered effectively one person – because of this, even if you both run entirely separate businesses, only one will be able to claim Employment Allowance as they are deemed connected companies (controlled by the same person or persons).
In respect to business takeovers, should Company A buy out Company B, they are not entitled to any of the Employment Allowance formerly available to B in that tax year, however they can still use the full amount originally available to A. Any Employment Allowance used by Company B before the buyout does not need to be repaid by either company.
Business demergers are a similar story – should a business split mid-tax year, the new company/companies will not be entitled to any Employment Allowance within that tax year.
Before you claim, check these points.
Do you have more than one employee or director with Employer NI?
Are you connected to another company or charity?
Are any employees excluded from the claim?
Has there been a takeover, demerger or business restructure?
Need help checking your payroll position?
If you are unsure whether your business can claim Employment Allowance, or whether connected company rules affect you, our payroll and tax teams can help you check before making a claim.
Frequently Asked Questions.
How do I claim it?
Employment Allowance must be claimed for through your payroll software, by submitting an Employer Payment Summary (EPS) to HMRC – it should be noted that these are not automatic, so if you don’t do one you won’t get anything, and also don’t carry over across the tax years, meaning you or your payroll provider will need to resubmit annually.
When can I claim Employment Allowance?
You can claim at any time during the current tax year, however the earlier you do it the sooner you will feel the benefit. Employment Allowance is not pro-rated, so you are still entitled to the full £10,500 even if you claim at the end of the year.
What happens if I don’t use it all?
Unfortunately, if you haven’t used all of your Employment Allowance by the end of the tax year, you simply lose the remaining amount. Despite what some AIs will tell you, it cannot be allocated to any other liabilities like VAT or corporation tax.
Can I claim for previous years?
Employment Allowance can be claimed for the previous 4 tax years and will be offset to current or future PAYE liabilities – if none of these are due to arise, you can ask HMRC for a repayment of the unused balance. It’s important to note that you will only get the amounts of Employment Allowance as it was set in the prior tax years (£5,000 between April 2022 and April 2025, and £4,000 between April 2021 and April 2022), so don’t get your hopes up for four years’ worth of £10,500.
Can a sole director still claim Employment Allowance if they employ someone who leaves during the tax year?
Yes – if a single director company were to employ someone incurring Employer’s NI liabilities, who left within that tax year, the company can continue to claim Employment Allowance. This is not affected by the length of the employee’s tenure, and the Employment Allowance will cover the liabilities suffered by the director. You should be aware however this will only last the current tax year and will not carry into others.
Can a sole trader claim it?
Yes, the self-employed/sole traders can claim Employment Allowance, if they are operating a payroll and have employees paying Employer’s NI on their wages.
Useful official guidance.
For more detail, you may also find HMRC’s own Employment Allowance guidance helpful.
