Employment Allowance 2026/27: How Small Businesses Save £10,500
Employment Allowance lets eligible UK employers offset up to £10,500 of their employer National Insurance bill each tax year. For many small businesses this means paying zero employer NI — a significant cash-flow boost. This guide explains who qualifies, how to claim, worked examples with 2026/27 rates, and common pitfalls to avoid.
2026/27 Employment Allowance — Key Figures
Employment Allowance
£10,500
per business per tax year
Employer NI Rate
15%
on wages above £5,000/yr secondary threshold
Eligibility Threshold
Under £100k
employer NI bill in prior tax year
Secondary Threshold
£5,000
per employee per year (employer NI starts here)
What is Employment Allowance?
Employment Allowance is a government scheme that allows eligible UK employers to reduce their employer Class 1 National Insurance Contributions (NICs). In the 2026/27 tax year, you can offset up to £10,500 from your employer NI bill — the same level introduced in April 2025 when the allowance was doubled from £5,000.
Employer NICs are charged at 15%on each employee's earnings above the secondary threshold of £5,000 per year (£416.67 per month). With an average UK salary of around £35,000, a business pays roughly £4,500 in employer NI per employee. The Employment Allowance can wipe that cost for up to two employees — or significantly cut the bill for larger teams.
The allowance is applied against your employer NI throughout the tax year, not as a lump-sum payment. Each time you run payroll and employer NI becomes due, HMRC offsets it against your Employment Allowance balance until it is used up.
Example: A business with five employees each earning £28,000 would owe approximately £17,100 in employer NI in 2026/27. With Employment Allowance, the effective bill drops to £6,600 — a cash saving of £10,500.
The allowance was introduced in April 2014 to help small businesses manage their payroll costs. It has been increased several times since, most recently to £10,500 in April 2025 — the largest single increase in its history. HMRC estimates that over 1 million employers benefit from the allowance each year.
Who is Eligible in 2026/27?
The Employment Allowance is available to most employers who pay Class 1 NICs. The key eligibility rules for 2026/27 are:
You CAN claim if:
- You are a limited company with at least two employees (or two directors) on the payroll.
- You are a sole trader or partnership with at least one employee who is not you.
- You are a charity or community amateur sports club (CASC) — the £100,000 NI bill threshold does not apply to you.
- Your total employer NI bill for 2025/26 was less than £100,000.
- You are a business in any sector (subject to the de minimis check for agriculture, fisheries, and road freight).
You CANNOT claim if:
- You are the sole employee of your company and also a director — even if you pay yourself above the secondary threshold.
- Your employer NI bill in the previous tax year (2025/26) was £100,000 or more.
- You employ someone for personal or domestic work (cleaner, nanny, gardener) unless they are a care worker.
- You are a public authority such as a local council, NHS body, or government department.
- You are a business that carries out more than 50% of its work in the public sector (unless you are a charity).
Important: You must check your eligibility at the start of each tax year. If your employer NI bill grew substantially during 2025/26 and crossed £100,000, you will not be eligible for 2026/27 even if you claimed successfully in prior years.
How to Claim Employment Allowance
Claiming Employment Allowance is straightforward and is done entirely through your payroll software. There is no separate form to file with HMRC.
Check your eligibility
Confirm your employer NI bill for 2025/26 was below £100,000 and that none of the exclusions apply to your business.
Enable Employment Allowance in your payroll software
In most software (Xero, QuickBooks, Sage, FreeAgent, HMRC Basic PAYE Tools), there is a checkbox labelled "Employment Allowance" in the employer settings. Tick it at the start of the tax year.
Submit an Employer Payment Summary (EPS)
Your payroll software will include the Employment Allowance indicator in your EPS submission to HMRC. This notifies HMRC that you are claiming.
Offset against employer NI payments
Each month, your software will automatically reduce the employer NI you owe by offsetting it against your remaining Employment Allowance balance until the £10,500 is used up.
Re-claim every April
Employment Allowance does not roll over automatically. You must re-enable it in your payroll software at the start of each new tax year (6 April).
If you use an accountant or payroll bureau, they will typically handle this process on your behalf. Check with them at the start of the tax year to confirm the claim has been submitted.
Worked Examples with 2026/27 Rates
Employer NI is charged at 15%on each employee's earnings above the secondary threshold of £5,000 per year. The examples below show the impact of Employment Allowance on businesses of different sizes.
Example 1: Sole trader with two part-time employees
Sarah runs a marketing consultancy as a sole trader. She employs two part-time assistants, each earning £18,000 per year.
| Item | Amount |
|---|---|
| Taxable earnings per employee (£18,000 − £5,000) | £13,000 |
| Employer NI per employee (15% of £13,000) | £1,950 |
| Total employer NI (2 employees) | £3,900 |
| Employment Allowance applied | −£3,900 |
| Net employer NI payable | £0 |
Sarah saves £3,900. The remaining £6,600 of Employment Allowance goes unused — it cannot be carried forward or refunded if unused.
Example 2: Limited company with six employees and one director
Brightfield Ltd employs six people at an average salary of £32,000. The director also takes a salary of £50,000.
| Item | Amount |
|---|---|
| 6 employees taxable earnings (6 × (£32,000 − £5,000)) | £162,000 |
| Director taxable earnings (£50,000 − £5,000) | £45,000 |
| Total taxable earnings above secondary threshold | £207,000 |
| Total employer NI (15% of £207,000) | £31,050 |
| Employment Allowance | −£10,500 |
| Net employer NI payable | £20,550 |
Brightfield Ltd saves the full £10,500 Employment Allowance, reducing their employer NI bill from £31,050 to £20,550.
Example 3: Contractor limited company — sole director, not eligible
James operates a limited company as a contractor. He is the sole director and only employee, paying himself £50,270 per year.
Not eligible. Because James is both the sole director and only employee, he cannot claim Employment Allowance. His employer NI on the £45,270 above the £5,000 secondary threshold is £6,790.50 (15% of £45,270) — all payable in full. If James hired even one other employee, the company would become eligible to claim the full £10,500.
Common Mistakes and Pitfalls
Despite its simplicity, Employment Allowance catches out many business owners. Here are the most frequent errors and how to avoid them.
Forgetting to re-claim each year
Employment Allowance must be re-claimed annually. Your payroll software does not automatically carry over the claim. Many businesses miss out simply because they did not tick the box at the start of the new tax year.
Single-director companies claiming incorrectly
If you are the only employee and a director, you are not eligible. This is the most common cause of Employment Allowance compliance issues uncovered in HMRC enquiries.
Exceeding the £100,000 NI bill threshold
If your employer NI bill grew rapidly and crossed £100,000 in 2025/26, you cannot claim for 2026/27. Always check the prior year figure before claiming.
Not claiming when eligible to backdate
Many small businesses are unaware they can backdate claims up to four years. If you missed Employment Allowance in 2022/23, 2023/24 or 2024/25, you may be able to recoup significant amounts.
Connected companies each claiming the allowance
If two or more companies are connected (common ownership or control), they can collectively claim only one Employment Allowance between them. Trying to claim once per company is not permitted and can result in penalties.
Backdating Employment Allowance Claims
If you have not claimed Employment Allowance in previous years but were eligible, you can submit a backdated claim for up to four complete tax years. In June 2026, that means you can claim back to 2022/23.
| Tax Year | Allowance | Claim by |
|---|---|---|
| 2022/23 | £5,000 | 5 April 2027 |
| 2023/24 | £5,000 | 5 April 2028 |
| 2024/25 | £5,000 | 5 April 2029 |
| 2025/26 | £10,500 | 5 April 2030 |
| 2026/27 (current) | £10,500 | 5 April 2031 |
To backdate, submit an EPS through your payroll software for the relevant year, or contact HMRC directly. Any backdated credit is first applied to outstanding PAYE or NI debts; any surplus is refunded.
The eligibility rules that applied in the year you are claiming for must have been met. You cannot claim 2022/23 allowance if you were a sole director company at the time, or if your NI bill exceeded £100,000 in 2021/22.
Interaction with Other Taxes and Reliefs
Employment Allowance sits within a broader UK employer tax landscape. Understanding how it interacts with other obligations helps you optimise your overall position.
Corporation Tax
Employment Allowance reduces the employer NI you pay as a cash cost. Employer NI is a deductible business expense for Corporation Tax purposes — so reducing your NI bill slightly reduces your allowable deductions, but the net result is still a substantial cash benefit. Small companies with profits under £50,000 pay Corporation Tax at 19%; those above £250,000 pay 25%; marginal relief applies in between.
Employee National Insurance
Employment Allowance only offsets employer Class 1 NI. Your employees continue to pay employee NI at 8% on earnings between the Primary Threshold (£12,570/yr) and the Upper Earnings Limit (£50,270/yr), and 2% on earnings above that. These are entirely unaffected by the Employment Allowance.
Auto-Enrolment Pension Contributions
Employment Allowance does not interact with auto-enrolment pension obligations. Employer minimum pension contributions of 3% of qualifying earnings remain a separate cost. However, the cash freed up by Employment Allowance can be used to enhance employer contributions above the statutory minimum — a tax-efficient use of the saving.
Statutory Payments (SMP, SPP, SSP)
Statutory Maternity Pay (SMP) is paid at £184.03/week (or 90% of average weekly earnings in the first six weeks, if higher). Statutory Sick Pay (SSP) is £116.75/week. Employers reclaim 92% of SMP from HMRC, rising to 103% for small employers with an annual NI bill under £45,000. Employment Allowance reduces your recorded NI bill — be aware this could affect your small employer SMP reclaim status if your bill sits close to the £45,000 boundary.
National Living Wage
The National Living Wage for workers aged 21 and over is £12.71/hr in 2026/27. A full-time worker (37.5 hrs/week) on NLW earns approximately £24,785/year. Employer NI on that wage is 15% of (£24,785 − £5,000) = £2,967.75. The £10,500 Employment Allowance offsets the employer NI for up to three such full-time NLW workers entirely — a meaningful subsidy for labour-intensive small businesses.
VAT Registration
Employment Allowance has no direct interaction with VAT. The VAT registration threshold for 2026/27 is £90,000 in taxable turnover. However, businesses that save employer NI through Employment Allowance and are VAT-registered can reclaim input VAT on accountancy and payroll software costs incurred in administering the allowance.