Employment Allowance 2026/27: Can a Sole Director Company Claim?

The Employment Allowance (EA) is one of the most valuable reliefs available to small employers in the UK. In 2026/27 it is worth £10,500, offset against your employer National Insurance bill. But if you run a limited company where you are the only director and the only employee, you cannot claim it -- even though you are technically an employer. Here is why, and what you can do about it.

What Is the Employment Allowance?

The Employment Allowance allows eligible employers to reduce their employer National Insurance contributions (Class 1 secondary NI) by up to £10,500 per tax year. This is a significant saving given that employer NI now runs at 15% above the £5,000 secondary threshold from April 2025.

For a company paying a director salary of £50,000, the employer NI bill would be approximately £6,750 ((£50,000 - £5,000) x 15%). Without the EA, this cost falls entirely on the business. With it -- if eligible -- it could be reduced to zero.

Why Sole Directors Cannot Claim

The exclusion is set out in the National Insurance Contributions Act 2014 and subsequent HMRC guidance. The rule is:

A company whose only employee is also a director cannot claim the Employment Allowance.

The rationale is that the EA was designed to support businesses employing people other than their owners -- reducing the cost of taking on workers. A single-director company is considered more analogous to a self-employed person than to a conventional employer.

This catches out a huge number of small limited companies. Many contractors, freelancers and micro-businesses operating through a personal service company (PSC) are in exactly this position.

What Does "Only Employee" Actually Mean?

The test is applied at any point during the tax year. If, at any time during 2026/27, your company has at least one employee who is not a director, you become eligible. The non-director employee does not need to be full-time or permanent.

• A part-time assistant employed for even one month: eligible.
• A family member on payroll for administrative work (at a genuine commercial rate): eligible.
• Another director who is not the same person and is on the payroll: potentially eligible (check HMRC guidance on multi-director companies).

Note: a dormant director or a director paid no salary does not generally count as an employee for this purpose.

Claiming the Employment Allowance via Payroll

The EA is claimed through your payroll software by submitting an Employer Payment Summary (EPS) to HMRC with the EA indicator set to Yes. You do not claim it on your Corporation Tax return or via a separate form.

The allowance is offset against your employer NI liability each month. If your monthly employer NI bill is lower than the allowance, the unused balance carries forward. Any unused portion at year end is lost -- it does not carry over to the next tax year.

De Minimis State Aid

The Employment Allowance is classified as de minimis state aid under UK subsidy control rules. This matters if your company is in certain regulated sectors (agriculture, fisheries, road transport) where de minimis aid limits apply. For most limited companies, the annual de minimis ceiling is well above £10,500, so this rule rarely causes problems. But it is worth being aware of if you operate in a regulated industry.

When You Hire Your First Employee: What Changes

The moment your company takes on a non-director employee, your eligibility for the Employment Allowance changes. Provided your employer NI bill was below £100,000 in the previous tax year, you can claim from the start of the tax year in which you become eligible.

To claim:

1. Set up the new employee on your payroll software.
2. Submit an EPS with the EA indicator set to Yes at the start of the relevant tax year (or mid-year when you become eligible).
3. Your employer NI is reduced by up to £10,500 from that point.

Note that the £100,000 threshold applies to your employer NI bill in the previous tax year, not your company's turnover or profits. This limit means the EA is only available to smaller employers.

Alternative NI Savings for Sole Directors

If you are a sole director and cannot claim EA, there are other ways to manage your NI position:

• Set your salary at the NI Secondary Threshold (£5,000 in 2026/27). At this level, your company pays zero employer NI. Combined with director's dividends, this is the classic tax-efficient structure for small limited companies.
• Salary at the Lower Earnings Limit (£6,500 in 2026/27). This triggers zero NI but still qualifies the year for State Pension purposes.
• Review your overall remuneration mix. Dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate) -- generally lower than salary for most tax positions, though Corporation Tax changes reduce the advantage somewhat.

The EA exclusion for sole directors is a firm rule with no workaround short of taking on an additional employee. But the tax planning options available to small limited companies remain substantial even without it.