Employment Allowance: a guide for UK charities
Charities can claim up to £10,500 off their employer National Insurance bill through the Employment Allowance for the 2026-27 tax year [1]. Around 1,418,000 employers benefited from the relief in the most recent tax year, a rise of roughly 195,000 on the year before, and charities sit squarely inside the pool of eligible bodies [2].
For a charity running tight on restricted funds, that allowance is a direct reduction in staffing cost. With the employer rate of National Insurance sitting at 15% on earnings above a £5,000 Secondary Threshold [3], every pound of relief matters more than it did a few years ago. Yet the rules for charities carry two twists that a business does not face: the connected-charities test, and the public sector exclusion.
This guide sets out who qualifies, how the £10,500 allowance is applied, the special connected-charities rule that limits a group to a single claim, the public sector boundary, and the exact steps a charity takes to claim through payroll.
Key takeaways
- The Employment Allowance is worth up to £10,500 for the 2026-27 tax year and reduces employer Class 1 National Insurance only [1].
- Charities are explicitly eligible, including where more than half their work is in the public sector [4].
- Where two or more charities are connected, only one may claim the allowance for the tax year [5].
- The claim is made through payroll by setting the Employment Allowance indicator to 'Yes' on an Employer Payment Summary [6].
- A charity can claim for up to four earlier tax years if it was eligible and did not claim at the time [7].
What the Employment Allowance is worth to a charity
The Employment Allowance is a fixed annual amount that an eligible employer can offset against its secondary Class 1 National Insurance contributions, the National Insurance an employer pays on staff wages. For the 2026-27 tax year it is set at £10,500 [1]. It is not a cash grant and it is not paid out. It simply stops the charity paying employer National Insurance until the £10,500 of relief is used up.
The value has grown sharply. The allowance rose from £5,000 to £10,500 on 6 April 2025, doubling the relief available to every eligible employer [8]. At the same time, the £100,000 eligibility cap was removed, so employers with a large secondary National Insurance bill in the previous tax year are no longer shut out [8]. For many mid-sized charities that had grown past the old threshold, that change reopened the door.
How the allowance is applied across the year
The allowance is not handed over in one lump. It is used against the charity's total employer Class 1 National Insurance liability month by month until the £10,500 ceiling is reached [6]. A charity with a modest payroll may take most of the year to absorb the full allowance, while a larger charity may exhaust it within the first few months and pay employer National Insurance as normal after that.
The table below shows how the allowance behaves for charities of different sizes across a tax year, assuming employer National Insurance at 15% above the £5,000 Secondary Threshold [3].
| Charity payroll profile | Approx. annual employer NI | Employment Allowance used | Net employer NI after relief |
|---|---|---|---|
| One part-time coordinator | £900 | £900 | £0 |
| Small team, three staff | £8,000 | £8,000 | £0 |
| Mid-sized, ten staff | £28,000 | £10,500 | £17,500 |
The pattern is clear: smaller charities often wipe out their employer National Insurance entirely, while larger ones treat the £10,500 as a flat reduction on a bigger bill. Either way, the relief only ever offsets employer National Insurance, never income tax, employee National Insurance or the Apprenticeship Levy [6].
Which charities can claim
A charity qualifies for the Employment Allowance if the wages it pays give rise to an employer secondary Class 1 National Insurance liability [4]. In practice that means the charity must employ at least one person paid above the £5,000 Secondary Threshold and must operate a PAYE scheme. Community amateur sports clubs are treated on the same footing as charities for this purpose [4].
The definition of a charity for the allowance follows the general tax definition, so a body registered with the Charity Commission or recognised by HMRC as a charity for tax purposes will normally meet it [9]. A charity that runs its activities through a separate trading subsidiary should look carefully at which entity actually employs the staff, because the claim belongs to the employing entity, not the charity brand as a whole.
The public sector exclusion and why charities escape it
Most employers cannot claim the allowance if they do more than half their work in the public sector, a rule aimed at bodies such as local councils and NHS services [4]. Charities are the important exception. A charity may still claim the Employment Allowance even where more than half of its work is carried out in the public sector, for example a charity delivering services under contract to a local authority [4].
This carve-out is significant for the large number of charities that survive on public sector contracts. Without it, a care charity delivering council-commissioned services would lose the relief. HMRC guidance for public bodies and their related entities confirms that genuine charities keep the allowance despite public sector income, provided they meet the charity definition [10]. A well-configured HMRC-recognised payroll platform will let a charity apply the allowance without manual workarounds, but the eligibility judgement still sits with the trustees.
The connected-charities rule
The rule that most often trips up charities is the connected-charities test. If two or more charities are connected with each other at the start of the tax year, only one of them can claim the Employment Allowance for that year [5]. The allowance attaches to the group, not to each separate charity, so a federation of five connected charities still shares a single £10,500, not five separate allowances.
When two charities count as connected
Charities are connected for Employment Allowance purposes only if two conditions are both met: their purposes and activities are the same or substantially similar, and they are controlled by the same or connected persons [5]. Two charities with entirely different charitable aims are not connected for this test even if they share a trustee, because the purposes limb fails.
For charitable trusts, control turns on the trustees. A charitable trust is connected with another charitable trust if at least half the trustees of one are also trustees of the other, or are connected with persons who are trustees of the other, provided the activities are the same or substantially similar [11]. The two-limb structure means a shared board alone does not create a connection unless the charitable purposes also overlap.
Choosing which charity claims
Where charities are connected, the group decides which one takes the allowance [5]. The sensible choice is the charity expected to generate the highest employer Class 1 National Insurance liability in the tax year. There is no entitlement to any unused balance based on a connected charity's National Insurance bill, so allocating the allowance to a small charity that cannot absorb the full £10,500 wastes the remainder [5].
The table below sets out the practical difference the allocation choice makes for a two-charity group sharing one allowance.
| Allocation choice | Charity A NI (large) | Charity B NI (small) | Allowance actually used |
|---|---|---|---|
| Allowance to Charity A | £10,500 relieved | pays own NI | £10,500 |
| Allowance to Charity B | pays own NI | £2,000 relieved | £2,000 |
Allocating to the larger employer captures the full relief. Allocating to the smaller one throws away £8,500 of allowance that cannot be recovered. Accountants and bureaux managing several connected charities usually track this centrally, and a multi-client payroll dashboard makes the allocation visible across every scheme at the start of the year.
State aid and charities that trade in goods
A further limit applies to a minority of charities. The Employment Allowance is treated as de minimis state aid where the charity is engaged in making or selling goods that affect trade between Northern Ireland and the European Union under the Windsor Framework [8]. A charity that only provides services is outside the state aid rules and does not need to worry about the ceilings [8].
For charities that do fall within the goods rules, the allowance counts towards a rolling three-year de minimis ceiling that varies by sector. Most sectors sit under a general industrial ceiling, while agriculture and fisheries carry lower sector-specific limits [8]. A charity near its ceiling should total its other de minimis support before claiming, because exceeding the limit can put earlier aid at risk. This is a narrow issue that affects few charities, but a charity shop chain moving goods into Northern Ireland is exactly the kind of body that needs to check.
How a charity claims the allowance
The claim is made through payroll, not through a separate application form. A charity, or its agent, sets the Employment Allowance indicator to 'Yes' the next time it sends an Employer Payment Summary to HMRC [6]. If the charity's payroll software does not have an Employer Payment Summary field, HMRC's Basic PAYE Tools can be used to send one [12].
Once made, the claim carries forward automatically from one tax year to the next until the charity tells HMRC it is no longer eligible, or HMRC decides it is no longer eligible [13]. A charity therefore claims once and does not need to reclaim every April, though it should review eligibility each year, especially if its connected-charity relationships change [13].
Claiming for earlier years
A charity that was eligible in the past but never claimed can go back. Claims for closed tax years are allowed for up to four years after the end of the tax year the allowance applies to, and a separate Employer Payment Summary is required for each year of claim [7]. For a charity that only recently realised it qualified, this can return several thousand pounds of overpaid employer National Insurance across the eligible years [7].
Charities running payroll in-house should confirm their software submits the Employer Payment Summary correctly, since a claim that is filed but not transmitted delivers no relief. Software that holds the HMRC Recognised badge submits the indicator with the routine payroll cycle, and an HMRC-recognised payroll API can set the allowance flag programmatically for platforms that run payroll for many charities at once. For charities that also pay an Apprenticeship Levy, the two reliefs interact separately and are worth reading together with a guide to the Apprenticeship Levy.
Common mistakes charities make with the allowance
Three errors account for most of the lost relief among charities. The first is failing to claim at all. A large share of employers claiming the allowance are micro employers, and many small charities assume the relief is only for commercial businesses when it applies to them equally [2]. A charity with a single part-time employee paid above the Secondary Threshold has a valid claim [4].
The second is misallocating a shared allowance within a connected group, sending it to a small entity that cannot absorb the full £10,500 and losing the balance [5]. The third is treating the claim as fire-and-forget without reviewing eligibility when the charity's structure changes. A merger, a new shared trustee board, or the creation of a connected trading arm can all change the connected-charities position and require the group to consolidate to one claim [11].
Good record-keeping closes all three gaps. A charity should note, at the start of each tax year, which entity holds the allowance, confirm the Employer Payment Summary carried the indicator, and diarise a short annual eligibility check. Bureaux handling several charity schemes typically automate this review rather than repeat it by hand for each client [13].
Conclusion
The Employment Allowance is one of the most valuable and least complicated reliefs available to a UK charity, worth up to £10,500 a year against employer National Insurance and claimed with a single payroll flag. The doubling of the allowance and the removal of the £100,000 cap have widened its reach, and the public sector carve-out keeps it available to the many charities delivering commissioned services. For most charities the only real complexity is the connected-charities rule, which demands a deliberate choice about which entity in a group holds the single shared allowance.
As employer National Insurance settles at its higher rate, the case for claiming every available relief on every payroll only grows. Charities that review their eligibility each April, allocate a shared allowance to the highest-liability entity, and check whether any earlier years remain open will capture the full value the relief was designed to deliver. Understanding how the underlying employer National Insurance charge works is the foundation for getting the allowance right.
Frequently asked questions
Can a charity claim Employment Allowance if most of its funding comes from a local council?
Yes. The public sector exclusion that blocks councils and NHS bodies does not apply to charities. A charity can claim the Employment Allowance even where more than half of its work is in the public sector, including work delivered under contract to a local authority [4]. The charity still needs at least one employee paid above the £5,000 Secondary Threshold to have an employer National Insurance liability to offset [3].
If a charity runs several connected charities, how many allowances can it claim?
Only one. Where two or more charities are connected at the start of the tax year, the group is entitled to a single Employment Allowance of £10,500, and the charities decide between them which one claims it [5]. Charities are connected only where their purposes and activities are the same or substantially similar and they are controlled by the same or connected persons [11].
Does a charity need to reclaim the Employment Allowance every year?
No. A claim carries forward automatically from one tax year to the next once made, so a charity claims once by setting the Employment Allowance indicator to 'Yes' on an Employer Payment Summary [13]. The charity should still review its eligibility each year and tell HMRC if it stops qualifying, for instance if it becomes connected with another charity that claims the allowance [6].
Can a charity claim Employment Allowance for a year it missed?
Yes, within limits. A charity can make a claim for up to four tax years after the end of the year the allowance relates to, provided it was eligible and did not already claim [7]. Each earlier year needs its own Employer Payment Summary with the Employment Allowance indicator set to 'Yes', and no claim can be made for years before the relief existed [7].
