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 2026/27?
This article has been updated for the 2026/27 tax year.
Employment Allowance – The Basics
The scheme was implemented to help stimulate economic growth and encourage small firms to hire more employees.
Eligible employers can claim it, subject to the exclusions below. From April 2025, the restriction for employers with a previous-year Class 1 secondary NIC bill of £100,000 or more was removed.
In 2026/27, an eligible 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.
- Sole traders cannot use the allowance against National Insurance on their own profits, but can claim against employer Class 1 NICs for eligible employees.
- You normally cannot claim if half or more of your work is in the public sector, such as work for local councils or NHS services. Charities have different eligibility rules; see HMRC’s eligibility guidance.
- 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 hire additional staff. If you’re a one-person company with no employees, your company cannot claim the EA. This rules out a large proportion of professional contractors’ companies.
- For a company with one director who is paid above the secondary NIC threshold, an additional employee must also earn above the applicable secondary threshold. That employee can be another director. The annual threshold for directors is £5,000 in 2026/27; ordinary employees are assessed using the threshold for their pay period.
- See Section 14 of this Government EA guide for 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 that incur employer’s 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 2026/27.
- You don’t pay any Employees’ NICs if your salary is below 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 26/27 here.
Employment Allowance 26/27 – £12,570 salary
If your company can claim the EA, is it worth paying the director(s) a £12,570 salary in the 2026/27 tax year, rather than £6,708 (the LEL, the lowest salary so the year counts towards your state pension entitlement)?
| Tax | £6,708 salary | £12,570 salary |
|---|---|---|
| Income tax | Nil | Nil |
| Employer’s NICs | Nil (£256.20 refunded by EA) | Nil (£1,135.50 refunded by EA) |
| Corporation Tax saved (minimum) | £1,274.52 | £2,388.30 |
| Corporation Tax difference | Nil | £1,113.78 |
| Net savings to the company | Nil | £1,113.78 |
| Employee’s NICs (paid by director) | Nil | Nil |
- If the company pays its director(s)/employee(s) a £12,570 salary, the EA offsets the £1,135.50 Employers’ NI bill per employee.
- No Income Tax is payable on either salary in the table above, as the Personal Allowance for 2026/27 is £12,570.
- By paying a salary of £5,862 above £6,708, the company also saves at least £1,113.78 in Corporation Tax per employee. The Corporation Tax saving depends on the company’s marginal tax rate. Marginal relief generally applies between £50,000 and £250,000 of profits, with the 25% main rate above £250,000; these limits are reduced for associated companies and short accounting periods.
- The employee has no employees’ NICs to pay either.
- 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.
- A fresh EA claim is needed each tax year. Unused allowance cannot be carried forward, although eligible claims for earlier years can be made within the four-year time limit.
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?
A company with one director who is its only employee liable for secondary Class 1 NICs cannot claim. A company with two paid directors can qualify where both earn above the applicable secondary threshold, subject to the other eligibility rules.
What if I hire a second employee during the tax year?
If the additional employee meets the secondary-threshold test, the company can qualify for the whole tax year, subject to the other conditions. See HMRC’s guidance on changes during the year.
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?
It does not change your VAT position. It can affect Corporation Tax because employer NICs covered by the allowance do not also create a deductible company expense.
Do I need to repay the allowance if I become ineligible mid-year?
An employee leaving so that only the director remains above the secondary threshold does not, by itself, remove eligibility for that tax year. Check eligibility again for the next year. Other changes can require you to stop a claim and repay the allowance, so check HMRC’s rules before changing the EPS indicator.
Is there a de minimis state aid limit?
The de minimis state aid restrictions were removed for claims from 6 April 2025. They can still matter for eligible claims relating to 2024/25 or earlier; check HMRC’s previous-year rules.
What happens if I close my limited company part-way through the year?
The annual allowance is not reduced in proportion to the months traded, but can only offset eligible employer NICs actually incurred. Do not stop the claim solely because the company no longer employs anyone; HMRC’s guidance says the allowance stops at the tax-year end.
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.
- Find out the true cost of employing staff with our employer cost calculator.
- For more information, visit GOV.UK.
Recommended Contractor Accountants
- Aardvark Accounting – All-inclusive – £89 per month, no catch-up fees
- Bright Ideas Accounting - £119/month, 5-star Google rating
- SG Accounting – First 3 months at £59.50 pm, no catch-up fees
- Clever Accounts – IR35 FLEX – take on any contract you are offered
- Integro Accounting – 6 months fixed fee accountancy - half price!