Employment Allowance 2026/27: Who Qualifies and How to Claim £10,500
The Employment Allowance reduces your employer NI bill by up to £10,500 in 2026/27. Learn who qualifies, the sole director exclusion, connected company rules, and how to claim through payroll.
The Employment Allowance (EA) is worth £10,500 per year in reduced employer National Insurance contributions -- a significant saving for any business with employees. From April 2025, the allowance was increased from £5,000 to £10,500, meaning even businesses with modest payrolls may now exhaust it within the first few months of the tax year. Yet many eligible employers still fail to claim it, leaving thousands of pounds unclaimed. Understanding who qualifies, how to claim, and where the exclusions bite is essential for every employer.
How the Employment Allowance reduces your NI bill
The Employment Allowance is a direct reduction in employer Class 1 National Insurance payments to HMRC. Employer NI is charged at 15% on each employee's earnings above the Secondary Threshold (£5,000 per year in 2026/27, reduced from £9,100 from April 2025).
Without EA, a company with two employees each earning £30,000 would pay:
- Employer NI per employee: (£30,000 - £5,000) x 15% = £3,750.
- Total employer NI: £7,500 per year.
With EA, the £10,500 allowance is offset against the first £10,500 of employer NI. Since the total employer NI is only £7,500, the EA wipes out the entire bill -- the company pays £0 in employer NI in this example.
For a larger business, the EA would be exhausted before year-end:
- Company with employer NI of £50,000 per year.
- EA reduces the year's payments to £50,000 - £10,500 = £39,500.
- The £10,500 is typically used up by around month 2 or 3 of the tax year.
The sole director exclusion in detail
The Employment Allowance is not available to companies where:
- There is only one employee.
- That employee is also the director of the company.
- The employee is the only person paid above the Secondary Threshold (£5,000 per year).
This exclusion was specifically targeted at personal service company (PSC) directors who operate as the sole employee of their own company. The original EA was introduced to support employment, and HMRC excluded single-director-single-employee companies from the policy's scope.
How to become eligible: The exclusion falls away as soon as the company has a second person paid above the Secondary Threshold in the tax year. This could be:
- A part-time employee earning above £5,000 (not difficult -- even someone working 2 days a week at minimum wage exceeds £5,000).
- A second director paid above the threshold.
- Any other worker on the payroll earning above £5,000.
For many owner-managed companies, taking on a spouse, partner, or family member as a genuine employee unlocks the EA -- provided the employment is real and the salary is commercial.
Connected companies: one allowance to share
Under the Employment Allowance rules, companies under common control are "connected" and must share a single £10,500 allowance. The key rule: only one connected company can claim the EA in any given tax year.
What makes companies connected?
- One person (or company) has "control" of both -- broadly, owning more than 50% of the shares or having the ability to direct the company's affairs.
- Companies in the same group are always connected.
Example: Sarah owns 100% of Company A and 100% of Company B. Company A employs 5 people; Company B employs 3 people. Only one of the two companies can claim the £10,500 EA. Sarah should instruct the company with the highest employer NI liability to claim it (to maximise the benefit).
If connected companies unknowingly both claim, HMRC can recover the duplicate claim plus interest.
Claiming through payroll: step by step
The EA is claimed entirely through the payroll process -- no separate application to HMRC is required:
- In your payroll software, find the Employment Allowance setting (usually in the employer or company settings section).
- Indicate that you are claiming EA and confirm eligibility (the software will ask whether you are a sole-director company, etc.).
- Submit your Employer Payment Summary (EPS) to HMRC -- this is done monthly alongside the regular Full Payment Submission (FPS). The EA claim is embedded in the EPS.
- Your monthly employer NI payment is automatically reduced by the available EA balance. If your monthly employer NI is less than the remaining EA balance, your payment for that month is £0 and the EA carries forward to the next month.
- Continue until the £10,500 is exhausted or the tax year ends -- whichever comes first. Unused EA at year end is lost.
Class 1A NI: not covered by the EA
The Employment Allowance only reduces employer Class 1 NI (on employees' wages and salaries). It does not apply to:
- Class 1A NI: payable on benefits-in-kind (P11D items) at 13.8% (or 15.05% -- confirm current rate). Class 1A is paid in a single lump sum by 19 July (22 July for electronic payment) and does not benefit from the EA.
- Class 1B NI: payable on items included in a PAYE Settlement Agreement.
- Any other NI liability.
For businesses with significant benefits-in-kind (company cars, private medical insurance), the Class 1A bill can be substantial. These cannot be reduced by the Employment Allowance.
Retrospective claims for previous years
If you were eligible for the Employment Allowance in a prior year but failed to claim it, you can submit a retrospective claim for up to 4 prior tax years:
- 2022/23: Deadline to claim retrospectively is 5 April 2027.
- 2023/24: Deadline is 5 April 2028.
- 2024/25: Deadline is 5 April 2029.
- 2025/26: Deadline is 5 April 2030.
A retrospective claim is made by resubmitting an amended Employer Payment Summary for the relevant year. Any overpaid employer NI from the prior year is repaid to you by HMRC (usually as a credit on your payroll account).
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What is the Employment Allowance in 2026/27?
The Employment Allowance (EA) is a relief that reduces an employer's Class 1 National Insurance contributions (employer NI) bill by up to £10,500 per tax year. From April 2025, the limit increased from £5,000 to £10,500. Eligible employers claim the allowance through their payroll software, and it is applied against each monthly or weekly employer NI payment until the allowance is exhausted.
Who is eligible for the Employment Allowance?
Most employers who pay Class 1 National Insurance contributions are eligible, including limited companies, sole traders, partnerships, charities, and community interest companies. The main exclusions are: single-director companies with no other employees paid above the Secondary Threshold, companies where the sole director is the only person paid above the threshold, and companies that employ someone in their private home (e.g. household staff).
What is the sole director exclusion?
If a limited company has only one employee who is also the sole director, and that person is the only one paid above the Class 1 NI Secondary Threshold (£5,000 per year), the company cannot claim the Employment Allowance. This exclusion was introduced because HMRC viewed single-director companies claiming EA as a form of double relief. A second employee earning above the threshold unlocks the EA.
How does the Employment Allowance work for connected companies?
Connected companies -- broadly, companies under common control -- can only claim one Employment Allowance between them. The companies must decide which entity will claim. They cannot each claim a full £10,500. The combined claim across all connected entities is limited to £10,500 per year.
How do I claim the Employment Allowance?
You claim through your payroll software. There is a field in most payroll systems to indicate that you are claiming the EA. When you submit your Employer Payment Summary (EPS) to HMRC, the EA claim is included. Your payroll software will then automatically reduce your monthly employer NI payments until the £10,500 has been used up. No separate form needs to be filed.
What Class 1 NI does the Employment Allowance reduce?
The EA reduces only the employer's secondary Class 1 NI contributions. It does not reduce employee NI, Class 1A NI on benefits-in-kind, or Class 1B NI under a PAYE Settlement Agreement. The EA is applied month by month until exhausted, with any unused allowance at year end lost.
Can charities and community interest companies claim the Employment Allowance?
Yes. Charities and CICs (Community Interest Companies) can claim the Employment Allowance on the same basis as commercial employers, subject to the same eligibility conditions. The EA is available for any eligible employer paying Class 1 NI.
What happens if I over-claim the Employment Allowance?
If you claim EA when you are not eligible (for example, as a sole director company with no other staff), HMRC may recover the over-claimed amount with interest and potentially penalties. If you realise you have incorrectly claimed, you should correct the EPS submission and repay any underpaid employer NI. HMRC does cross-check EA claims.
Can I claim the Employment Allowance for previous years if I missed it?
Yes. You can make a retrospective EA claim for up to 4 prior tax years. You would submit a corrected Employer Payment Summary for the relevant year. However, retrospective claims require that you were eligible in that year and the £10,500 (or whatever the limit was in that year) was not already claimed.
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