Employment Allowance 2025/26
£10,500 NIC Relief

The Employment Allowance is one of the most valuable but most misunderstood reliefs for UK employers. For the 2025/26 tax year it more than doubled to £10,500, a deliberate sweetener to soften the simultaneous increase in employer National Insurance rates and the sharp drop in the threshold at which employer NI starts. If you run a business with employees, claiming it is essential, but a quirk in the rules means a large number of one-person companies are specifically shut out. Here is exactly how it works for 2025/26.

The Big 2025/26 Changes

Three things changed at once on 6 April 2025, and they interact. Understanding all three is the key to understanding why the allowance was raised.

1. The allowance jumped from £5,000 to £10,500. A doubling-plus, the largest single increase in the relief's history.
2. The employer NI rate rose from 13.8% to 15%. Every pound of employer NI now costs more.
3. The secondary threshold fell sharply to £5,000 per year. Employer NI now starts on earnings above just £5,000, down from £9,100, dragging far more of each salary into charge.

The combined effect is that employer NI bills rose substantially, but the larger allowance shields smaller employers from much of the impact. The government also removed the £100,000 cap that previously barred employers whose prior-year employer NI bill exceeded £100,000, so eligibility now turns purely on the structure of your workforce, not the size of your bill.

Who Can Claim

Most employers who pay employer Class 1 National Insurance can claim, including limited companies, partnerships, sole traders with staff, and charities. But there are important exclusions.

The other key rule is that connected employers share a single allowance. If you control several companies, the group gets one £10,500 allowance between them, not one each, and you choose which company claims it.

The Single-Director Company Trap

How to make a one-person company eligible

This is the rule that catches owner-managed businesses most often. A limited company cannot claim the Employment Allowance if the only employee paid above the £5,000 secondary threshold is a single director.

The policy intent is to stop one-person companies from using a relief meant to encourage genuine employment. To become eligible, such a company typically needs one of the following:

• A second director, with both directors paid above the secondary threshold
• A genuine employee (not a director) paid above the secondary threshold

A common, legitimate response is for a director to employ a spouse or family member who genuinely works in the business and is paid above £5,000. Provided the employment is real and the pay is for actual work, this makes the company eligible and can unlock the full allowance. The work must be genuine; a sham arrangement would be challenged.

A Worked Example: A Small Company With Two Staff

Consider a marketing agency, a limited company, with two employees each earning £35,000 in 2025/26. Neither is a sole director acting alone, so the company qualifies.

Employer NI is charged at 15% on earnings above the £5,000 secondary threshold:

• Per employee, the NI-able amount is £35,000 − £5,000 = £30,000.
• Employer NI per employee = 15% of £30,000 = £4,500.
• For two employees, total employer NI = £9,000.

The £10,500 Employment Allowance fully covers this £9,000 liability, reducing the company's employer NI bill to zero for the year, with £1,500 of allowance unused. Without the allowance, the company would have paid £9,000 in employer NI.

Because the company pays less employer NI, its profit is slightly higher, which has a knock-on effect on corporation tax. You can model the after-NI profit position using the corporation tax calculator.

How to Claim

Claiming is refreshingly simple and done through your payroll:

1. Tick the Employment Allowance indicator in your Employer Payment Summary (EPS), which your payroll software submits to HMRC. In HMRC's Basic PAYE Tools and all commercial software there is a single yes/no field.
2. Claim once per tax year. You do not re-claim each month; once set, the allowance runs until exhausted.
3. The allowance applies automatically against your monthly employer NI, reducing what you pay until the full £10,500 is used.
4. You can backdate a claim for up to four previous tax years if you missed it, recovering employer NI you should not have paid.

If your circumstances change mid-year (for example you become a single-director company), you must stop claiming, so keep your eligibility under review.

How the Allowance Interacts With Other Taxes and Reliefs

The Employment Allowance sits in a specific lane. Knowing what it does and does not touch prevents costly assumptions:

• It offsets employer (secondary) Class 1 NI only. It does not reduce the employee's own income tax or their employee (primary) National Insurance, which still come out of wages as normal.
• It does not directly reduce corporation tax. However, a lower employer NI expense increases taxable profit slightly, so there is an indirect interaction with corporation tax.
• It is unrelated to the self-employed NI classes. Sole traders pay Class 4 (and Class 2) National Insurance on their own profits, which is entirely separate from the employer Class 1 NI that the Employment Allowance reduces. If you are self-employed and curious about your own NI, see our guide to Class 4 National Insurance. The Employment Allowance only becomes relevant to a sole trader once they take on staff.
• State aid / de minimis rules. The Employment Allowance is treated as subsidy under certain rules, and businesses in some sectors must ensure claiming it does not breach their applicable subsidy limits. Most small employers are well within any limits.

Why the Increase Matters for Small Employers

The doubling of the allowance was a direct response to the squeeze created by the higher 15% NI rate and the much lower £5,000 secondary threshold. Without the increase, small employers would have faced a steep rise in the cost of employing each member of staff. With it, the government estimates that the majority of the smallest employers pay no employer NI at all, because the £10,500 allowance covers their entire liability.

For a sole trader thinking about hiring their first employee, or a small company budgeting for the year, the practical message is that the first slice of employer NI is effectively free up to £10,500. That changes the maths on taking on staff considerably.

As Making Tax Digital for Income Tax rolls out from April 2026 for sole traders earning over £50,000, keeping accurate digital records of payroll, NI, and the reliefs you claim becomes part of the routine. TapTax helps you keep those figures clean and your obligations on track, whether you file as a sole trader or run payroll through a company.