Employment Allowance Explained: How to Reduce Your National Insurance Bill
For many employers, Employment Allowance is one of the simplest ways to reduce your tax bill, yet it’s still frequently misunderstood or missed altogether.
With the new tax year starting on 6 April 2026, now is the time to review your position and make sure you’ve claimed it. Otherwise, you could be paying more National Insurance than necessary.
What is Employment Allowance?
Employment Allowance allows eligible employers to reduce their annual employers’ Class 1 National Insurance liability by up to £10,500.
Rather than receiving a lump sum, the allowance is applied automatically through your payroll. Each time you run payroll, your employers’ National Insurance bill is reduced until:
the £10,500 allowance is fully used, or
the tax year ends
If your total liability is less than £10,500, you can still claim - you’ll simply reduce it to nil.
Who Can Claim?
You can claim Employment Allowance for the current tax year if:
You are a business or public body, and
Less than half of your work is in the public sector (e.g. not mainly working with local councils or the NHS)
You can also claim if:
You’re a charity (including community amateur sports clubs)
You employ a care or support worker (for example, supporting someone with a disability)
Who Cannot Claim?
There are a few key exclusions to be aware of:
Single-director companies where the director is the only employee paying employers’ National Insurance
Businesses where more than 50% of work is in the public sector
Employers including workers caught by IR35 off-payroll working rules
Individuals employing staff for personal or domestic work (e.g. nannies or gardeners), unless they are care/support workers
Important Change from April 2025
From April 2025, a key restriction has been removed:
Employers with Class 1 National Insurance liabilities over £100,000 are now eligible to claim
Previously, this threshold excluded many growing businesses, so this change opens up the allowance to a much wider group.
Groups and Multiple Payrolls
If your business structure is more complex, there are additional rules:
If you’re part of a group of companies or charities, only one entity can claim
If you operate multiple payrolls, the allowance can only be applied to one payroll
Planning where to allocate the allowance can make a difference.
What About Previous Years?
You can still claim Employment Allowance retrospectively for up to 4 tax years, provided you were eligible at the time.
Previous allowance levels were:
£5,000 per year (April 2022 to April 2025)
£4,000 (April 2021 to April 2022)
To claim for earlier years, your employers’ NIC liability must have been below £100,000 in the previous tax year (under the old rules).
When Should You Claim?
You must claim each tax year - it does not roll over automatically.
You can claim at any time, but earlier is better:
The sooner you claim, the sooner your NIC bill is reduced
Late claims may require adjustments or refunds via HMRC
If you don’t fully use the allowance:
HMRC may offset it against other tax liabilities (e.g. VAT or Corporation Tax), or
Issue a refund after the tax year ends
However, you cannot claim the unused balance as cash beyond your actual NIC liability.
How to Claim
The process is straightforward:
Submit an Employment Payment Summary (EPS) through your payroll software
Set the “Employment Allowance indicator” to ‘Yes’
If your software doesn’t support this, you can use HMRC Basic PAYE Tools.
Once submitted:
You can start using the allowance immediately
HMRC will not send a confirmation
If rejected, you’ll receive a notification within around 5 working days
A Commonly Missed Opportunity
Employment Allowance is often overlooked by:
Small businesses assuming they don’t qualify
Growing companies unaware of the rule changes
Groups not optimising which entity claims
A quick eligibility check can result in a meaningful annual saving with very little administrative effort.
Final Thoughts
Employment Allowance is one of the more straightforward reliefs available to employers, but only if it’s actively claimed and correctly applied.
With the April 2025 changes expanding eligibility, it’s a good time to review whether your business (or group) should be making use of it.