Employment Allowance and employer National Insurance for small companies

Understand employer National Insurance

When a company pays employees, including director-employees, it must normally pay secondary (employer) Class 1 National Insurance on earnings above the Secondary Threshold, in addition to deducting the employee's own primary Class 1 National Insurance from their pay. The employer's contribution is a direct cost to the company, separate from what is deducted from the employee.

From 6 April 2025 the Secondary Threshold was reduced to £5,000 a year (from £9,100 previously) and the employer rate increased from 13.8% to 15%, with the lower threshold fixed until April 2028. These changes increased the employer NIC cost for many businesses, particularly those with several employees earning modest salaries. Confirm the current year's threshold and rate before budgeting payroll costs.

Worth knowing: Always check GOV.UK's current rates and thresholds for employers before quoting a specific figure in a payroll budget.

Understand the Employment Allowance

The Employment Allowance lets eligible employers reduce their total employer Class 1 National Insurance liability for the tax year, up to a maximum of £10,500. The allowance is claimed against the company's own liability over the year through payroll, rather than paid as a lump sum, so it reduces each payment until the allowance is used up or the tax year ends.

From April 2025, the previous restriction that limited the allowance to employers with total employer Class 1 National Insurance liabilities below a set amount in the previous tax year was removed, extending eligibility to more employers, though other eligibility conditions still apply.

Check the single-director company exclusion

A specific rule excludes a company from claiming the Employment Allowance if, at the time the claim is made, the only employee (or director) paid earnings above the Secondary Threshold is also a director of the company. This is aimed at single-director companies with no other paid staff, which are common among small consultancy and contracting businesses.

If the company has a second employee, or a second director, also paid above the threshold, the exclusion does not apply and the allowance can usually be claimed, subject to the other general eligibility conditions. Check this each tax year, since staffing changes during the year can change eligibility going forward (though not retrospectively undo a properly made earlier claim in the same year, depending on when the change occurs).

Check the other eligibility conditions

Beyond the single-director exclusion, eligibility depends on factors including whether the employer is in the public sector performing mostly public functions (generally excluded), connected company rules that mean the £10,500 cap is shared across connected employers rather than claimed separately by each, and de minimis state aid rules for some sectors.

Connected companies under common control must decide which one (or how the allowance is shared) claims the allowance; the group as a whole cannot claim multiples of £10,500 by splitting staff across related companies. Check connection rules carefully if you operate more than one company.

• Most public sector employers cannot claim the Employment Allowance.
• Connected companies share a single allowance rather than each claiming £10,500.
• Certain sectors face state aid-related limits on claiming the allowance.
• Eligibility is assessed for the whole tax year in which the claim is made.

Claim through your Employer Payment Summary (EPS)

The Employment Allowance is not automatic; eligible employers must claim it each tax year through their payroll software by submitting an Employer Payment Summary (EPS) to HMRC indicating the claim. Most payroll software includes a simple setting to confirm eligibility and make the claim as part of routine submissions.

Once claimed, the allowance reduces employer Class 1 National Insurance due with each payroll run until the full amount has been used or the tax year ends; it does not automatically carry forward or get paid as a refund if unused, except in limited circumstances such as correcting an earlier underclaim within time limits.

1. 1

   Confirm eligibility, including the single-director exclusion and any connected-company sharing.

2. 2

   Set the Employment Allowance claim indicator in your payroll software for the tax year.

3. 3

   Submit the Employer Payment Summary (EPS) to HMRC confirming the claim.

4. 4

   Check each payroll run that the allowance is reducing the employer National Insurance due.

5. 5

   Review eligibility again at the start of each new tax year rather than assuming last year's claim continues automatically.

Worked scenario: two companies compared

Illustrative scenario: Company A has a sole director paid a salary above the Secondary Threshold and no other staff. It cannot claim the Employment Allowance because of the single-director exclusion, so it pays the full 15% employer National Insurance on earnings above £5,000 with no offsetting allowance.

Company B has the same sole director but also employs a part-time assistant paid above the Secondary Threshold. Because more than one person is paid above the threshold, Company B is not excluded and can claim the Employment Allowance through its EPS, reducing its employer National Insurance bill by up to £10,500 across the tax year, provided the other eligibility conditions are met.

Worth knowing: Whether a very small company can claim the Employment Allowance often depends on staffing structure, not on turnover or profit.

Plan payroll costs with the current figures

Because the Secondary Threshold and employer rate have changed significantly in recent years, and the Employment Allowance rules have also changed, rebuild your payroll cost forecasts each year rather than reusing a prior year's spreadsheet. Small changes in threshold or rate can materially change the employer NIC cost of hiring.

If you are deciding between taking on a second employee or using a contractor, factor in the realistic employer NIC and Employment Allowance position for each option, alongside pension auto-enrolment duties and other employment costs, rather than comparing headline pay rates alone.

Common questions

Official sources & further reading

This guide draws on the official guidance below. Rules, fees and individual circumstances can change; check the relevant source before acting.

• GOV.UK: Employment Allowance: What you'll get
• GOV.UK: Rates and thresholds for employers 2025 to 2026
• GOV.UK: Changes to the Class 1 NICs Secondary Threshold, rate and Employment Allowance from 6 April 2025

General UK information, primarily for private companies limited by shares. This is not personalised legal, tax or financial advice. An accountant or solicitor can help apply the rules to your situation.