The Employment Allowance reduces the National Insurance employers’ pay by up to £10,500 per year. So, can your limited company benefit from this incentive in 2025/26?
This article has been updated for the 2025/26 tax year.
Employment Allowance – The Basics
The scheme was implemented to help stimulate economic growth and encourage small firms to hire more employees.
It is open to all businesses. Before the 2025/26 tax year, the EA was only available to businesses with a total NI bill of £100,000 or less.
In 2025/6, a company can write off the first £10,500 of its Employers’ NIC bill each year using the Employment Allowance. This limit was increased from £5,000 in 2024/5 following an announcement in the Autumn Budget.
The Allowance is ‘claimed’ monthly via your firm’s payroll process as the liability arises.
So, Employers’ NICs are not payable until your company has used up its entire £10,500 allowance.
Employment Allowance eligibility for limited companies
- You can only claim the Allowance if you pay Class 1 Employers’ National Insurance Contributions – as limited companies do.
- The self-employed are ineligible to claim against any profits they draw down personally, as they pay Class 2 and Class 4 Contributions. However, they can claim if they have employees and make Class 1 NICs.
- You cannot claim if you provide services to a public sector body.
- If you are caught by IR35, the Allowance cannot be claimed against deemed salary payments.
- Sole director companies without additional employees cannot claim the Allowance. The whole point of the EA is to encourage firms to take on extra staff! So, if you’re a one-man band, without employees, your company cannot claim the EA. This rules out a large proportion of professional contractors’ companies.
- If your company has one or more employees, at least one other person, in addition to the director, must be paid above the secondary NIC threshold of £5,000 per year to qualify (this threshold was reduced from £9,100 in 2024/5).
- See Section 14 of this Government EA guide which provides examples of when the EA can be claimed by small companies. For example, you can claim the EA if you and your spouse are directors and earn above the secondary Class 1 NIC threshold.
Things to consider when setting salary levels
Your company will only benefit from this government measure if it pays salaries to directors and employees, which incur employers’ national insurance.
As salary levels increase, income tax and Employees’ NIC liabilities also rise, so several things must be considered when setting the ideal salary level.
- The Personal Allowance (the amount you can earn before paying any income tax) is £12,570 in 2025/26.
- You don’t pay any Employees’ NICs if your salary is beneath the Primary Threshold.
- Your company pays Employers’ National Insurance at 15% on salaries above the Secondary Threshold of £5,000 per year.
Find out what the most tax-efficient director’s salary is for 25/26 here.
Employment Allowance 25/26 – £12,570 salary
If your company can claim the EA, is it worth paying the director(s) a £12,570 salary during the 2025/26 tax year, compared to £9,100?
| Tax | £6,500 Salary | £12,570 Salary |
|---|---|---|
| Income Tax | Nil | Nil |
| Employers’ NICs | £225 | Nil (£1135.50 refunded by EA) |
| Corporation Tax saved (minimum) | £1,277.75 | £2,388.30 |
| Corporation Tax difference | Nil | £1,110.55 |
| Net Saving to Company | Nil | £1,110.55 |
| Employees’ NICs (paid by director) | Nil | Nil |
- If the company pays its director(s) / employees(s) a £12,570 salary, the EA offsets its £1135.50 Employers’ NI bill per employee.
- No Income Tax is payable on either salary in the table above, as the Personal Allowance for 2025/26 is £12,570.
- By paying a salary of £6,070 more than the £6,500 salary, the company also saves a minimum of £1,110.55 in Corporation Tax per employee. The savings will be more significant if your profits are above £50,000 per year.
- The employee has no employees’ NICs to pay.
- In these examples, we assume that your total personal income is less than £100,000, as the £12,570 personal allowance is eroded by £1 for every £2 you earn above £100,000.
- The EA must be claimed every year in order to receive it, and relief can no longer be carried over between tax years, as it has been in previous tax years.
Employment Allowance FAQs
What is the purpose of the Employment Allowance?
The Employment Allowance reduces a business’s annual National Insurance liability by up to £10,500 (from April 2025), by lowering the cost of employing staff.
Can a limited company with only one employee claim it?
Generally, no. Since April 2016, companies where the sole employee is also a director are excluded. There must be more than one paid employee who is not a director earning above £5,000.
What if I hire a second employee during the tax year?
If you hire a second employee mid-year, and both earn above the secondary NIC threshold, you may then become eligible to claim the EA from that date onwards.
Do umbrella company contractors benefit from the Employment Allowance?
No. The umbrella company, not the contractor, is the employer. They may claim the allowance for their own company employees, but individual contractors won’t benefit.
Is the allowance applied automatically?
No, you must claim it via your payroll software or HMRC’s Basic PAYE Tools. It’s not provided automatically.
Can you backdate the EA to previous tax years?
You can backdate EA claims by up to four tax years. You must have met the eligibility criteria during those years and submit amended EPS (Employer Payment Summary) returns to HMRC.
Can I claim Employment Allowance if I use an external payroll provider?
Yes. Your payroll provider can make the claim on your behalf, but you – as a director – remain responsible for checking eligibility.
Does the allowance apply to directors’ salaries?
Yes – if the company qualifies. But remember, sole-director companies without other employees aren’t eligible.
Can the Employment Allowance be used against Class 1A or Class 1B NICs?
No, it can only be used to offset Class 1 Secondary NICs (employer NICs), not Class 1A or Class 1B NICs.
Does using the allowance affect your Corporation Tax or VAT?
No. It solely reduces your employer National Insurance bill. It doesn’t affect Corporation Tax or VAT.
Do I need to repay the allowance if I become ineligible mid-year?
If you become ineligible after claiming (e.g. if your workforce drops to just one director), HMRC may ask you to repay the allowance.
Is there a de minimis state aid limit?
Yes. Until April 2020, Employment Allowance was classed as de minimis state aid. This may still affect you if you operate in Northern Ireland.
What happens if I close my limited company part-way through the year?
You can still claim the allowance for the portion of the tax year during which your company was live, assuming it met the eligibility criteria at the time.
Is the Employment Allowance available to partnerships?
Yes – provided the partnership (one or more self employed people working together) employs at least one person and meets the other eligibility requirements.
Where can I find my remaining allowance for the year?
Most payroll software shows how much of the £10,500 has been used. You can also check your PAYE account on the HMRC website. Ask your accountant if you’re unsure.
Further Information
- Although we have taken care in producing this article with help from our accountants, please ask your accountant if you have any questions about your salary level, and how your company could benefit from the Employment Allowance.
- For more information, visit GOV.UK.
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