On April 6th 2025, the NIC Employment Allowance increased from £5,000 to £10,500, following the Chancellor of the Exchequer, Rachel Reeves’s announcement in the previous October budget. This was introduced primarily as a way of protecting small businesses from the impact of the increase in National Insurance rates. There was also a removal of the £100,000 liability restriction, which expanded the eligibility for many organisations.
The National Insurance Employment Allowance can provide potential savings on employee NICs, but there are factors to consider before making a claim, including meeting the eligibility criteria for your organisation, the number of employees who aren’t directors and whether your business would be considered a “connected company”. Our guide is here to help you understand the allowance for employers and the impact it can have on your PAYE costs.
If you require more information or support, please don’t hesitate to contact the MSP Payroll team.
What is the National Insurance allowance for employers?
Put simply, the Employment Allowance allows employers of eligible companies the ability to reduce their NIC payments by up to £10,500. Each time an organisation runs payroll, the National Insurance Contributions are reduced until the threshold has been reached, after which, employers will continue to pay NIC at the full rate.
What are the benefits for organisations?
For many small to medium-sized organisations (SMEs), employers’ NIC and tax contributions can amount to a significant additional cost to the bottom line. The Employment Allowance provides an opportunity to reduce the pressure from monthly PAYE on cash flow and make it easier to employ more staff. The benefit is felt on every payroll run from the start of the tax year, adding a tangible impact, rather than coming at the end of the year, or backdated as can often be the case with Government initiatives.
It’s popular with employers – with 1.2m claiming the allowance in 24/25 (up from 50k in 23/24), and since the increase in thresholds, many accountants are now ensuring their clients are aware of the potential benefits from reducing NICs.
Speak to our team for advice and support in employment allowance eligibility and claiming employment allowance relief.
Which organisations are eligible for the employment allowance?
To be eligible for the Employment Allowance, the following must apply:
- The claimant is a business or public body
- The organisation cannot be classed as a public sector business
- If the business only has one director, they must also have at least one other employee
- The organisation is only trying to claim through one PAYE for one organisation
- Only one company in a group is claiming the allowance
Charities can apply for the employment allowance, as can care or support workers.
Single director company eligibility
If a limited business has only one director, and that person is the only employee, then the company is not eligible for the Employment Allowance and cannot claim any relief. Companies that only have one director and this person is the only employee paid above the secondary threshold for NIC of £5,000 per year cannot claim the Employment Allowance.
For a single director limited business to be eligible for the allowance, they must have more than one employee who is liable for secondary Class 1 National Insurance.
This can change within a given tax year. For instance, if the company employs additional workers and they are paid above the secondary threshold, then relief can be claimed for the whole tax year. If the company reduces its workforce during the tax year and becomes a single director limited business, then the Employment Allowance still applies until the end of that year.
This includes companies where more than one director earns over the secondary threshold, or where a limited business employs seasonal workers and one or more earn above the secondary threshold in a week.
When an organisation cannot claim the Employment Allowance
There are instances when an organisation cannot claim for certain employees, or workers connected to the business who are not on the payroll directly.
Contractors and agencies
Contractors or agencies that provide a service to the business, but are not directly paid through payroll, are not eligible for relief through the Employment Allowance. If contractors are working solely for the organisation in a role that could be held by an employee, they may be subject to IR35 rules instead.
Domestic Workers
If your employees could be classed as domestic workers, such as cleaners, gardeners or nannies, then their NICs cannot be included in an Employment Allowance claim. This does not apply to carers or support workers, for instance, for disabled people. These workers are eligible for relief.
Businesses or Organisations in the Public Sector and the Employment Allowance
If a business performs over half of its work for institutions such as state educational facilities, the NHS or the government, then they are classed as working in the public sector. This means they are not an eligible employer for the Employment Allowance and cannot claim relief on NICs.
Companies that are part of a group, or a subsidiary, will need to be aware of which company is applying for NIC relief and the percentage of revenue accrued from the public sector, as this could affect eligibility for the whole group.
This also applies to public authorities and GPs (where 50% or more of the work is for the NHS).
Educational Institutions and the Employment Allowance
State-run educational institutions, such as public secondary schools, cannot claim the Employment Allowance. However, if the school or facility is privately owned and operated, and it conforms to the other factors for eligibility, it will be able to claim NIC relief. This also includes any educational organisations that are classed as a charity.
This does mean that the organisation is subject to the same rules as other limited businesses or charities; if several academies are owned by one trust, just one allowance can be claimed.
Franchises
A franchise can claim the Employment Allowance as long as they do not try to claim for every franchise it owns. In this instance, the employer is entitled to make one claim for relief (£10,500).
We can help advise on eligibility for Employment Allowance claims – contact us here to find out more.
“Connected Companies” and the National Insurance allowance for employers
What is a connected company?
If a company controls, or is controlled by, another company, it is classed as connected. This also applies to charities which belong to a group or are controlled by the same person or people (such as trustees). Companies are also classed as connected if they are under the control of the same person or people.
Control could be classed (among other factors) as voting power, percentage of share ownership, trustees or the right to income. If any of these elements are true for two or more companies, then they are considered connected for the purposes of an Employment Allowance claim.
At the beginning of the tax year, if two or more companies are connected, then a decision has to be made as to which company will make the Employment Allowance claim. An organisation can only make one claim per PAYE scheme.
For the full details on connected companies, the Government has issued comprehensive advice.
What if two companies become connected during a tax year?
If a company acquires control of another during a tax year, then any remaining relief available to either company is no longer available. Similarly, if two companies diverge control during the tax year, they cannot then claim the Employment Allowance.
If you need advice on whether you are classed as a connected company, our team are happy to help.
What is the time limit for claiming the National Insurance Employment Allowance?
Organisations have time to claim for a tax year’s employment allowance. HMRC will allow four years for a claim to be made. For instance, for the tax year 2026/2027, a company will need to submit a claim by 5th April 2031. The claim will be subject to that tax year’s specifics; for example, any claims for tax years prior to 5th April 2025 will only be able to claim up to £5,000 relief, not the £10,500 available now.
How to make an Employment Allowance claim
Claiming the National Insurance Employment Allowance has been made relatively simple by HMRC. Most payroll software providers have added a simple check box facility in the software to add in NIC relief up to the current threshold.
If a company’s payroll software doesn’t support this, then they can use the Basic PAYE Tools facility from HMRC. If you then use two different platforms for NICs and PAYE, then ensure you keep a record of the Employment Allowance claimed in that tax year.
The easiest way to manage Payroll is by outsourcing to a professional Payroll Services Provider, such as MSP Payroll. Contact us here to find out more.
How can MSP Payroll help?
Our experts can provide comprehensive support across a range of Payroll consultancy and support, including:
- Ongoing payroll either fully outsourced to our team or supplemental support for your in-house payroll expertise.
- We can help you calculate whether your organisation meets the eligibility criteria
- We can provide ad-hoc payroll services on demand when you need them most. This could include support and advice on claiming the Employment Allowance or ensuring compliance with payroll processes.
- We are specialists for all payroll regulations and provisions, including SSP, SMP, pensions, seasonal payments, PAYE and National Insurance Contributions.
- We can provide payroll software to process the employment allowance as part of our payroll services.
Contact us here if you would like to discuss implementing payroll support.
National Insurance Employment Allowance: Frequently Asked Questions
Can a company with only one employee claim the Employment Allowance?
No, the company must have more than one employee who is not a director and earns above the secondary threshold for National Insurance. Any company with a single employee who is also the director is exempt from the Employment Allowance.
How does claiming the Employment Allowance affect statutory payments such as SMP?
The Employment Allowance only offsets or provides relief for National Insurance Contributions made by an organisation with more than one employee earning above the secondary threshold. This means any statutory payment, such as SMP or SSP, is not reduced or affected. Only an employer’s NICs are reduced by the Employment Allowance; the employees’ contributions remain the same.
Can the Employment Allowance be backdated for previous tax years?
Yes, HMRC will allow claims backdated up to four years, although those claims will be subject to the older allowance relief rather than the current tax year’s rate.
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