Employers' Allowance: How the Relief Works
The Employers' Allowance is worth up to £10,500 per employer per tax year, and around 1,418,000 employers benefitted from it in the 2025 to 2026 tax year [1]. Take-up rose 16% in a single year, the sharpest jump since the relief was introduced [1].
Formally called the Employment Allowance, the relief reduces an employer's secondary Class 1 National Insurance liability rather than its tax bill, its wage bill or its Corporation Tax [2]. That distinction shapes everything about how it behaves in payroll.
It is an allowance per employer, not per employee. A business with three staff and a business with three hundred draw on the same £10,500 ceiling, which is why 85% of claimants are micro employers with between one and nine people on the payroll [1].
This article explains what the relief is, how it is applied through Real Time Information, how its value has moved since it was created, what happens to an unused balance, and the anti-avoidance rules that sit behind it.
Key takeaways
- The Employers' Allowance reduces employer secondary Class 1 National Insurance by up to £10,500 per tax year, applied per employer rather than per employee.
- It was introduced by the National Insurance Contributions Act 2014 and has risen from £2,000 to £10,500 across five separate increases.
- The allowance is offset automatically as liability arises through payroll, not paid as a cash sum.
- Micro employers with one to nine staff make up 85% of all claimants, and large employers with 250 or more staff account for under 1%.
- An employer that secures entitlement through avoidance arrangements loses the allowance for that tax year entirely.
- The claim must be renewed each tax year with a fresh Employer Payment Summary.
What the Employers' Allowance is
The Employment Allowance was introduced by section 1 of the National Insurance Contributions Act 2014 and applies from 6 April 2014 onwards [2]. An employer can claim it in a tax year provided it is a secondary contributor during that year and incurs a secondary Class 1 National Insurance liability [2].
Mechanically, it operates as a deduction that reduces the secondary Class 1 National Insurance an employer pays to HMRC at each payrun, continuing until the annual amount is fully used or the tax year ends, whichever comes first [2]. Nothing is refunded, nothing is paid across, and nothing arrives as a separate transaction.
The critical structural point is that the allowance attaches to the employer and not to headcount. An employer may reduce its secondary Class 1 liabilities only up to the annual amount, irrespective of how many people it employs [2]. A ten-person business and a five-person business both draw on the same ceiling.
Why it is a National Insurance relief and not a tax relief
Employer secondary Class 1 National Insurance is charged at 15% on earnings above the Secondary Threshold [3]. It is a cost of employing people that falls entirely on the employer, separate from the employee's own 8% primary contribution between the Primary Threshold and the Upper Earnings Limit [3].
The allowance sits against that employer-side charge only. It cannot be applied to Class 1A National Insurance on benefits in kind, nor to Class 1B on PAYE Settlement Agreements [4]. It has no effect on the income tax deducted from employees, on student loan repayments, or on pension contributions.
| Liability | Covered by the allowance |
|---|---|
| Employer secondary Class 1 National Insurance | Yes |
| Employee primary Class 1 National Insurance | No |
| Class 1A on benefits in kind | No |
| Class 1B on PAYE Settlement Agreements | No |
| PAYE income tax | No, though HMRC may offset an unused balance against it |
| Apprenticeship Levy | No |
The last row catches out employers with large pay bills. An organisation above the £3,000,000 pay bill threshold pays the Apprenticeship Levy at 0.5% in addition to employer National Insurance, and the Employers' Allowance does nothing to reduce it. Employers modelling total employment cost need to treat the two payroll obligations for larger employers as entirely separate lines.
How the value has changed
The allowance has been increased five times since it was created, and the eligibility rules around it have moved in both directions.
| From | Annual value | Accompanying change |
|---|---|---|
| April 2014 | £2,000 | Relief introduced for businesses, charities and amateur sports clubs |
| April 2015 | £2,000 | Extended to domestic employers of care and support workers |
| April 2016 | £3,000 | Sole-director companies excluded |
| April 2020 | £4,000 | Restricted to employers with prior-year liability below £100,000 |
| April 2022 | £5,000 | No structural change |
| April 2025 | £10,500 | £100,000 liability restriction removed |
The pattern is visible in the take-up figures [1]. Extending the relief to domestic employers of care and support workers from April 2015 pushed claimants from 1,117,000 to 1,290,000 [1]. Excluding sole-director companies from April 2016 cut them back to 1,170,000 [1].
The change that reshaped the relief
The most consequential shift came from 6 April 2025, when three things happened together. The allowance doubled from £5,000 to £10,500, the restriction limiting it to employers with prior-year National Insurance liability below £100,000 was removed, and the underlying employer National Insurance regime tightened [5].
The Secondary Threshold fell from £9,100 to £5,000 and the employer rate rose from 13.8% to 15% [1]. Employer National Insurance therefore begins earlier and accrues faster than it did before, which is why the doubled allowance did not translate into a doubled net benefit for every employer [5].
For a business paying five people £25,000 each, employer liability is 15% of the £20,000 that each salary carries above the £5,000 Secondary Threshold, which is £3,000 per employee and £15,000 across the payroll. The allowance covers £10,500 of that, leaving £4,500 payable. The same payroll under the previous threshold and rate would have generated a materially different figure, which is why year-on-year comparisons of National Insurance cost need to hold the threshold constant.
Who actually claims it
The distribution of claimants tells a clearer story about the relief than the eligibility rules do. Take-up is overwhelmingly concentrated among the smallest employers [1].
| Employer size | Employers claiming | Share |
|---|---|---|
| 1 to 9 employees | 1,205,000 | 85% |
| 10 to 49 employees | 188,000 | 13% |
| 50 to 249 employees | 22,000 | 2% |
| 250 or more employees | 4,000 | Under 1% |
By sector, wholesale and retail trade including motor vehicle repair is the largest single group at 227,000 employers, followed by construction at 186,000 and professional, scientific and technical activities at 178,000 [1]. Those three sectors account for 42% of all claimants between them.
Geographically, London leads at 258,000 employers, or 18% of the total, followed by the South East at 202,000 and the North West at 151,000 [1]. Every parliamentary constituency in the United Kingdom contains employers benefitting from the relief [1].
What the concentration implies
For an employer with nine staff on modest salaries, £10,500 can eliminate the employer National Insurance bill outright. For an employer with ninety, it covers a fraction. The relief is progressive in effect even though the amount is flat, because a fixed sum matters more against a smaller liability. The same asymmetry appears in the Apprenticeship Levy rules, where a flat £15,000 allowance sits against a pay bill measured in millions.
That has a practical consequence for payroll for one-person and very small businesses, where the allowance can be the difference between a National Insurance payment and none at all. It also explains why the relief attracts avoidance attention, which HMRC has addressed directly.
Anti-avoidance and the limits of structuring
An employer cannot qualify for the Employers' Allowance for any tax year if entitlement was secured through avoidance arrangements [6]. The test is a purpose test. Arrangements count as avoidance where the main purpose, or one of the main purposes, was to secure entitlement to the allowance [6].
The definition of arrangements is deliberately broad, covering any agreement, understanding, scheme, transaction or series of transactions, whether or not legally enforceable [6]. An informal understanding between shareholders can be caught as readily as a documented restructuring.
The scheme HMRC named
HMRC published a Spotlight setting out one arrangement caught by these rules [7]. A payroll company takes on a business's staff, then distributes them across a set of underlying companies, each employing a small number of people. The original business is invoiced for services on the basis that it no longer employs anyone, and each underlying company claims a full Employment Allowance, wiping out the employer National Insurance across the group [7].
The arrangement fails on two fronts. The anti-avoidance rule bites on purpose, and the connected company rules independently restrict a group of controlled companies to a single allowance between them [8].
The distinction that matters for ordinary businesses is between structuring that has a commercial rationale and structuring that exists to multiply the allowance. Separating a retail arm from a wholesale arm for genuine operational reasons is not avoidance. Splitting a single workforce across shell entities to claim the allowance several times over is.
Where disputes are resolved
Decisions and appeals relating to the Employment Allowance follow the standard National Insurance decision-making route, giving employers a formal mechanism to challenge HMRC's view of entitlement [9]. Employers relying on a finely balanced eligibility position should document their reasoning at the point of claim rather than reconstructing it later.
How the relief moves through payroll
The claim is made by setting the Employment Allowance indicator in the payroll software and submitting an Employer Payment Summary, which HMRC processes through Real Time Information [1]. When Full Payment Submissions follow at each payrun, the allowance is offset against the employer National Insurance due [1].
The amount claimed in any payment period must equal the employer secondary Class 1 liability for that same period, subject to the annual maximum [4]. The allowance cannot be front-loaded, spread evenly, or held back for a month with a larger bill.
A claim must be renewed for each new tax year with a fresh Employer Payment Summary [4]. It does not roll forward automatically, which is one of the annual tasks that sits alongside rate updates in any HMRC-recognised payroll platform at the start of the tax year. Where an employer changes payroll software mid-year, no second submission is needed, although the new software may require one to register the claim in its own records [4].
Software that cannot send an Employer Payment Summary
Where payroll software lacks Employer Payment Summary functionality, an employer can use HMRC Basic PAYE Tools to make the claim, regardless of employee numbers [10]. An employer taking that route while running payroll elsewhere must keep its own record of how much allowance has been used through the year [4].
That split-system arrangement is a reconciliation risk. Platforms that embed an HMRC-recognised payroll API carry the indicator and the running allowance balance in the same calculation layer as the payrun itself, so the offset and the submission never diverge. Developers integrating payroll into an existing product can review the submission endpoints in the API documentation.
Unused allowance at the end of the tax year
An employer that does not generate £10,500 of employer secondary Class 1 liability in a tax year does not lose the difference automatically. Where the allowance cannot be used in full against liabilities before the year ends, HMRC will offset the unused balance against other current or future PAYE liabilities so that, wherever possible, it is not lost [11].
The maximum award in any tax year is the lesser of total employer secondary Class 1 National Insurance for the year and the £10,500 annual amount [4]. An employer with £4,000 of liability receives £4,000 of relief, not £10,500 with £6,500 carried forward.
Where a claim is made after the tax year has ended, the award is offset against outstanding current or future PAYE liabilities, and an employer with no outstanding liabilities can request a repayment of the unused balance [4].
Records supporting a claim must be kept for at least three years after the end of the tax year, showing why entitlement existed, how much allowance was used or repaid, and which liabilities it covered [4]. Payroll software carrying the HMRC Recognised badge preserves that audit trail as a by-product of Real Time Information submission rather than as a separate exercise.
Conclusion
The Employers' Allowance has grown from a £2,000 gesture into a £10,500 line that materially changes the cost of a small payroll. Its doubling arrived alongside a lower Secondary Threshold and a higher employer rate, so the net position for any individual employer depends on the shape of its wage bill rather than on the headline figure.
What has not changed is the underlying architecture. It remains one allowance per employer, offset as liability arises, renewed annually, and policed by a purpose-based anti-avoidance rule. Employers that treat it as a standing feature of their payroll setup, checked each April rather than assumed, extract the full value without inviting scrutiny.
Frequently asked questions
Is the Employers' Allowance the same thing as the Employment Allowance?
Yes. The statutory name is the Employment Allowance, introduced by the National Insurance Contributions Act 2014, but employers and accountants commonly refer to it as the Employers' Allowance because it reduces the employer's own National Insurance rather than the employee's. HMRC guidance, payroll software fields and Employer Payment Summary submissions all use the formal term.
Does claiming the Employers' Allowance reduce how much an employee pays in National Insurance?
No. The relief applies only to employer secondary Class 1 National Insurance. An employee's primary Class 1 contributions, charged at 8% on earnings between the Primary Threshold and the Upper Earnings Limit, are entirely unaffected. Employees see no difference on their payslip whether or not their employer claims, and the claim has no impact on their National Insurance record or state pension entitlement.
Can an employer claim the allowance if its employer National Insurance bill is very large?
Yes. The restriction that limited the relief to employers with a prior-year employer National Insurance liability below £100,000 was removed from 6 April 2025. Employers of any size can now claim, provided they are not otherwise excluded as a public authority, a connected company that is not the nominated claimant, or a limited company whose sole director is the only above-threshold earner. The allowance remains capped at £10,500 regardless of the size of the liability.
What happens if an employer claims the allowance and later turns out not to have been eligible?
The claim must be stopped through the payroll software or HMRC Basic PAYE Tools, and any Class 1 National Insurance previously covered by the allowance becomes repayable. Late payment penalties and interest can apply to the resulting liability, and HMRC weighs factors such as whether the remaining PAYE was paid on time and how many months the allowance was claimed for. Where entitlement was secured through avoidance arrangements, the allowance is denied for the whole tax year.
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