Employment Allowance: Is Your Small Business Eligible?

Most small businesses that employ staff are eligible for the Employment Allowance, which reduces the employer National Insurance bill each year. The main exceptions are limited companies whose only paid employee is a director, public sector bodies, and companies connected to another company that already claims it.

It is not paid automatically. You have to claim it through payroll, and plenty of eligible employers never do. This guide explains who qualifies, who does not, how to claim, and the traps that lead to a claim being reversed.

Key takeaways

• The Employment Allowance reduces employer Class 1 National Insurance, up to an annual maximum.
• You must claim it through your payroll software; it is not applied automatically.
• Companies whose only employee above the secondary threshold is a director are generally excluded.
• Only one company in a connected group can claim.
• The rules have changed in recent years, so check the current position on GOV.UK.

What the Employment Allowance is

Employers pay Class 1 secondary National Insurance on employee earnings above a threshold. The Employment Allowance is a reduction in that bill, up to a set amount each tax year. Once claimed, it is offset against your employer National Insurance each pay period until the annual amount has been used.

It only affects employer National Insurance. Your employees' income tax and their own National Insurance are still deducted and paid in full, and workplace pension contributions are unaffected. The current maximum and the full rules are on GOV.UK's Employment Allowance guidance.

Who is usually eligible

Broadly, a business or charity that pays employer Class 1 National Insurance on employees' earnings can claim, unless it falls into one of the excluded groups. That covers most sole traders and partnerships with staff, and most limited companies with at least one employee who is not a director.

Eligibility conditions have been changed more than once in recent years, so an answer from an old article or a previous accountant may no longer be right. Always check the current eligibility rules on GOV.UK for the tax year you are claiming.

Who usually cannot claim

• Director-only companies. A limited company where the only employee paid above the secondary threshold is a director.
• Public bodies, and businesses doing more than half their work in the public sector, with some exceptions such as charities.
• Employers of domestic staff such as nannies or gardeners, unless the employee is a care or support worker.
• Connected companies beyond the first: only one company in a connected group can claim.

Likely eligible or not? Common situations compared

These are general positions, not rulings on your business. Edge cases, such as directors on very low salaries or staff who join partway through the year, need checking against the current guidance.

Step by step: how to claim

1. Check you are not in an excluded group, including the director-only rule.
2. If you control more than one company, decide which single company will claim.
3. In your payroll software, set the Employment Allowance indicator.
4. Send an Employer Payment Summary to HMRC so the claim is recorded.
5. Check that your next payments to HMRC reflect the reduced employer National Insurance.
6. Repeat the claim at the start of each new tax year if your software requires it.
7. If you were eligible in earlier years and did not claim, check whether you can still do so.

Worked example (illustrative example)

"Heron Street Bakery Ltd", an invented illustrative example, was set up with one director paid a salary through payroll. For its first year it was not eligible, because the director was the only employee paid above the secondary threshold.

In its second year it hired two bakers on full-time contracts. At that point it became eligible, so the director set the Employment Allowance indicator in the payroll software and sent an Employer Payment Summary before the next pay run. For the following months the company's employer National Insurance bill was reduced until the annual allowance was used up.

The director also owned a second, separate company. Because the two were connected, only one could claim, and they chose the bakery because it had the larger payroll. The companies and figures are invented to show how the rules apply, not advice about any real business.

Common mistakes

• Never claiming at all. The allowance is not automatic; eligible employers still have to tell HMRC.
• Claiming in a director-only company. HMRC can reverse the claim and ask for the National Insurance back.
• Claiming in two connected companies. Only one company in the group is entitled.
• Relying on old eligibility rules. Conditions have changed; check the current year's guidance.
• Forgetting it when budgeting a hire. It can change the real cost of a first employee, so include it in your figures.

Getting it handled

Our payroll service starts from £25 per month per employee and includes checking Employment Allowance eligibility and making the claim. If you are planning your first hire, see the true cost of an employee for the full budget, and limited company packages explained for where payroll fits alongside accounts and tax.

Not sure whether you qualify? Get in touch and we will check it for you.