Can a sole trader claim Employment Allowance?
A sole trader can claim Employment Allowance, worth up to £10,500 off an employer's National Insurance bill, but only where the sole trader employs staff and pays employer secondary Class 1 National Insurance [1] [2]. Around 1,418,000 employers claimed the relief in the 2025-26 tax year, and the construction sector, where sole traders are common, accounted for about 186,000 of those claims [4].
The confusion is understandable. Employment Allowance reduces the National Insurance an employer pays on employees, not the National Insurance a self-employed person pays on their own profits. A sole trader working alone has no employer National Insurance to offset, so there is nothing for the allowance to reduce.
This article explains exactly what the allowance cuts, when a sole trader qualifies, the one rule that makes sole traders better off than one-person limited companies, how much a small employer can save, and how the claim is made through payroll.
Key takeaways
- A sole trader with no employees cannot claim Employment Allowance, because it only offsets employer secondary Class 1 National Insurance, not self-employed Class 2 or Class 4.
- A sole trader who employs staff and pays employer National Insurance can claim the full £10,500 for the 2026-27 tax year.
- The single-director exclusion that blocks many one-person limited companies does not apply to sole traders at all.
- A sole trader with a single employee paid above the Secondary Threshold can claim, provided that employee is not excluded.
- Domestic workers such as a nanny or gardener cannot be included, unless they are a care or support worker.
What Employment Allowance actually reduces
Employment Allowance is a reduction in an employer's secondary Class 1 National Insurance liability, the National Insurance an employer pays on top of employees' wages [1]. It is applied against that liability each time payroll runs, until the £10,500 maximum for the 2026-27 tax year is used up or the year ends [1] [6]. The allowance cannot be set against Class 1A or Class 1B National Insurance, which cover benefits in kind [7].
The key word is employer. The allowance exists to reduce the cost of employing other people, which is why a business with no employees has nothing to claim against [2]. A sole trader who takes on staff becomes an employer for National Insurance purposes and gains access to the relief in the same way any other employer does [1].
Why a sole trader's own National Insurance is not covered
A self-employed sole trader pays National Insurance on their own profits through Class 2 and Class 4, not through the secondary Class 1 route the allowance offsets [10]. For the 2026-27 tax year, Class 2 National Insurance is £3.65 a week, and Class 4 is charged on profits above the Lower Profits Limit [10]. Neither of these is an employer contribution, so the allowance cannot touch them [5].
This is the single most common misunderstanding. A sole trader hoping to cut the National Insurance on their own drawings will find no relief here, because Employment Allowance was never designed to reduce a proprietor's personal contributions [10]. The benefit arrives only once the sole trader is paying National Insurance on someone else's wages [2]. Sole traders comparing the cost of taking on a first member of staff often model this alongside the wider payroll for one-person businesses they already run.
When a sole trader can claim Employment Allowance
A sole trader qualifies once they employ at least one person whose earnings trigger employer secondary Class 1 National Insurance, and the business meets the general conditions: it must be a business that does less than half its work in the public sector [2]. From 6 April 2025, the previous £100,000 National Insurance cap on eligibility was removed, so the size of the wage bill no longer affects whether a sole trader can claim [2] [4].
The single-director rule does not apply to sole traders
The rule that stops many one-person limited companies from claiming is that a company cannot claim where its only employee paid above the Secondary Threshold is a sole director [3]. HMRC states plainly that this restriction applies only to limited companies, and that if a business is self-employed, it does not apply [3].
This gives the sole trader a real advantage over an equivalent one-person company. A sole trader with a single employee paid above the Secondary Threshold can claim the allowance, whereas a company where only the director is paid above that threshold cannot [2] [3]. For a small trading business weighing up its structure, the point is worth noting alongside the wider employer National Insurance rules.
Employees a sole trader cannot include
Not every worker on a sole trader's books supports a claim. HMRC excludes anyone whose earnings fall within the IR35 off-payroll working rules, and anyone employed for personal, household or domestic work, such as a nanny or gardener, unless that person is a care or support worker [2] [9]. The care or support worker exception matters for sole traders who employ someone to care for a family member, because it lets a domestic arrangement qualify where it otherwise would not [2].
A sole trader whose only staff are excluded workers cannot claim, because there is no qualifying employer National Insurance liability to offset [2]. Confirming which employees genuinely count is the first step before setting a claim, and it is worth checking against the IR35 position for any contractor treated as an employee [9].
How much a sole trader can save
The value depends on how much employer National Insurance the wage bill generates. Employer secondary Class 1 National Insurance is charged at 15% on earnings above the Secondary Threshold of £5,000 a year for the 2026-27 tax year [6] [5]. The allowance covers that charge up to £10,500. The table below shows how the relief plays out for a sole trader employing staff each paid £24,000 a year.
| Sole trader scenario | Employer NI before allowance | Allowance applied | Employer NI payable |
|---|---|---|---|
| No employees | £0 (pays own Class 2 and Class 4 instead) | Cannot claim | Not applicable |
| One employee at £24,000 | £2,850 | £2,850 | £0 |
| Three employees at £24,000 | £8,550 | £8,550 | £0 |
| Five employees at £24,000 | £14,250 | £10,500 | £3,750 |
Each £24,000 employee generates £2,850 of employer National Insurance, calculated as 15% of the £19,000 paid above the £5,000 threshold [6] [5]. A sole trader with up to three such employees typically sees the entire employer National Insurance bill wiped out, and only once the bill exceeds £10,500 does any liability remain [1]. This is why 85% of all employers claiming the allowance are micro employers of one to nine staff, a group that includes many sole traders with a handful of employees [4].
The relief became more valuable to small employers from 6 April 2025, when the employer National Insurance rate rose from 13.8% to 15% and the Secondary Threshold fell from £9,100 to £5,000 [4] [6]. Both changes push up the employer National Insurance a wage bill generates, so a sole trader now faces a larger underlying charge that the allowance offsets. For a small business the practical effect is that claiming the allowance matters more than it did when employer National Insurance started at a higher threshold and a lower rate [5].
The same principle applies to a business partnership, which is treated as an employer in its own right and can claim the allowance on the same terms as any other employer, provided it employs qualifying staff [2]. What sets the sole trader apart is not the calculation but the absence of the single-director restriction, which never applies outside limited companies [3].
Sole trader versus a one-person limited company
The clearest way to see the sole trader's advantage is to set the two structures side by side. Both pay employer National Insurance on staff wages, but the single-director rule treats them very differently when the owner is the main earner [2] [3].
| Situation | Sole trader | One-person limited company |
|---|---|---|
| Owner works alone, no staff | Cannot claim, no employer NI arises | Cannot claim if director is the only person above the Secondary Threshold |
| Owner plus one employee above the Secondary Threshold | Can claim for the whole year | Can claim, because a second person is now above the threshold |
| Two directors or partners, no other staff | Not applicable to a sole trader structure | Can claim if both are paid above the Secondary Threshold |
The decisive difference sits in the first two rows. A sole trader is never caught by the single-director exclusion, so a first employee paid above the Secondary Threshold is enough to unlock the allowance [3]. A one-person company reaches the same position only once a second person is genuinely paid above that threshold [3].
Common mistakes sole traders make
The most frequent error is assuming the allowance reduces the owner's own National Insurance, which it never does, because Class 2 and Class 4 are outside the employer National Insurance the relief offsets [10] [1]. A close second is forgetting to renew the claim, since it lapses at the end of each tax year and must be set again [11].
A third mistake is counting excluded workers towards eligibility. A sole trader whose only worker is a domestic employee who is not a carer, or a contractor caught by IR35, has no qualifying liability and cannot claim [2] [9]. Accountants supporting several sole-trader clients usually track these details from a payroll bureau platform so no eligible claim is missed and no ineligible one is filed.
How a sole trader claims through payroll
Claiming is a payroll action, and a sole trader who runs payroll for staff can do it inside the software already in use [8]. Payroll software that holds the HMRC Recognised badge files the required Real Time Information returns and applies the allowance without manual work, which keeps the claim clean.
Setting and renewing the claim
To claim, the sole trader puts Yes in the Employment Allowance indicator field on an Employer Payment Summary sent to HMRC [8]. The claim must be renewed every tax year, because it does not carry over automatically, so the indicator has to be set again each April [11]. The earlier in the year the claim is made, the sooner the allowance reduces the National Insurance bill [11]. A sole trader who only pays occasional wages can still handle the underlying payslips through an instant payslip generator, then set the allowance indicator on the summary return.
Backdating and record-keeping
A sole trader who has employed staff in earlier years but never claimed can backdate a claim for up to four previous tax years, using a separate Employer Payment Summary for each year [7]. Records supporting the claim must be kept for at least three years after the end of the relevant tax year, showing entitlement, the amount used, and the liabilities covered [7]. Keeping the payroll figures tidy through reliable small business payroll software makes a backdated claim straightforward rather than a scramble through old records.
Conclusion
For a sole trader, Employment Allowance is not a way to cut personal National Insurance; it is a way to cut the cost of employing others. The line is clean: no employees means no claim, while a wage bill that generates employer National Insurance opens the door to up to £10,500 of relief.
The quiet advantage for sole traders is that the single-director trap, which catches so many one-person companies, simply does not apply to them, so even a first employee can unlock the allowance. As more small businesses take on their first member of staff, the sole traders who benefit most will be those who set the claim the moment payroll begins and renew it every April without fail.
Frequently asked questions
Can a sole trader with no employees claim Employment Allowance?
No. Employment Allowance only reduces employer secondary Class 1 National Insurance, and a sole trader working alone has no employer National Insurance to offset [1] [2]. A sole trader pays their own National Insurance through Class 2 and Class 4, which the allowance cannot touch [10].
Can a sole trader with one employee claim Employment Allowance?
Yes, provided the employee is paid above the Secondary Threshold and is not an excluded worker such as someone within IR35 or a domestic worker who is not a carer [2] [9]. The single-director rule that blocks one-person companies does not apply to sole traders [3].
How much can a sole trader save with Employment Allowance?
The allowance covers up to £10,500 of employer National Insurance for the 2026-27 tax year [1] [6]. A sole trader employing a few staff on modest salaries often has their entire employer National Insurance bill wiped out, since employer contributions are charged at 15% on pay above the £5,000 threshold [5].
How does a sole trader claim Employment Allowance?
The sole trader puts Yes in the Employment Allowance indicator field on an Employer Payment Summary sent to HMRC through their payroll software [8]. The claim must be renewed each tax year, and it can be backdated for up to four previous years using a separate summary for each [11] [7].
