Employment Allowance 2025/26: Boost Your Business Savings

The Employment Allowance 2025/26 lets eligible UK employers cut up to £5,000 from their annual National Insurance bill. It’s a simple way for small businesses and charities to save money on staff costs.

In this post, you’ll learn who can claim, how it works, and what’s new for 2025/26, so you can make the most of this valuable tax relief.

What Is the Employment Allowance 2025/26 and Why Does It Matter to UK Employers?

If you run a business in the UK and employ staff, you could be entitled to the Employment Allowance 2025/26 — a government scheme designed to cut your National Insurance (NI) bill.

In simple terms, Employment Allowance lets eligible employers reduce the amount of Class 1 National Insurance contributions they pay to HMRC. This means you keep more of your money and can reinvest those savings back into your business.

How Does the Employment Allowance Help Small Businesses Reduce National Insurance Costs?

For small businesses, every penny counts. The Employment Allowance offers up to £5,000 off your annual NI bill. If your total employer NI liability is less than £5,000, you won’t have to pay any employer NI at all.

Here’s why it matters:

• It lowers the cost of hiring and retaining employees.

• It supports cash flow, especially for new or growing businesses.

• It helps small employers compete with larger firms.

Who Introduced the Employment Allowance and What Is Its Purpose?

The Employment Allowance was first introduced by the UK government in April 2014. Its main purpose was to encourage small business growth and job creation by lowering employment costs. Since then, the allowance has become a core part of HMRC’s business support policy.

Over time, it has been adjusted to better target small and medium-sized enterprises (SMEs), rather than large corporations. Today, it continues to serve as a key incentive for employers to retain staff and create new jobs.

What Changes Have Been Made to the Employment Allowance in 2025/26?

For the 2025/26 tax year, the maximum allowance remains £5,000. While there are no major new legislative changes, HMRC has reinforced its focus on eligibility compliance, especially concerning connected companies and state aid declarations.

Employers should also note that digital payroll systems now provide improved automation for claiming and tracking Employment Allowance — making compliance easier, but accuracy more essential than ever.

Who Qualifies for the Employment Allowance 2025/26?

What Are the Eligibility Criteria for Employers in 2025/26?

To qualify for the Employment Allowance 2025/26, your business must:

• Have an employer NI liability below £100,000 in the previous tax year.

• Employ staff who are paid through PAYE.

• Not fall under specific exclusion categories (like certain public sector organisations).

This allowance applies to most small businesses, charities, and community organisations.

Can Sole Traders or Single-Director Companies Claim the Employment Allowance?

This is an area where many business owners get confused. If you operate as a limited company and are the only employee and director, you cannot claim Employment Allowance. This is because the government considers that situation not in the spirit of the scheme, which aims to help employers with multiple staff.

However, if your company employs at least one other person (even part-time or on a low wage), you can usually claim the allowance — as long as you meet all other eligibility criteria.

Which Employers Are Not Eligible for Employment Allowance 2025/26?

You can’t claim if:

• You’re a public sector employer (like local councils or NHS trusts).

• Your company’s NI liability in the previous year exceeded £100,000.

• You employ someone for personal or domestic work (e.g., a nanny or gardener).

• You’re already receiving the maximum de minimis state aid.

If you fall into any of these categories, HM Revenue and Customs (HMRC) will not approve your claim, and you could face repayment demands if you claim in error.

How Much Is the Employment Allowance in 2025/26?

What Is the Maximum Employment Allowance Amount for 2025/26?

The maximum allowance for 2025/26 is £5,000, the same as in 2024/25. While the figure hasn’t increased, it continues to provide a meaningful reduction for thousands of small UK employers.

To put it into context, a £5,000 saving could fund:

• The annual NI cost of hiring a full-time employee on £25,000.

• Training or apprenticeship programmes.

• New equipment or business technology investments.

This allowance is not a grant — it’s a reduction in your tax bill, meaning you’ll pay less to HMRC throughout the year until you reach the £5,000 cap.

How Is the Employment Allowance Applied Against Employer National Insurance Contributions?

Once you claim, your PAYE system automatically applies the allowance to your employer NI bill each time you pay staff.

Here’s an example of how it works:

If your NI bill is less than £5,000, you’ll stop paying NI altogether once the allowance covers your full liability. If your liability exceeds £5,000, you’ll continue paying NI once the allowance is used up.

This automated process helps employers avoid overpayments and makes it easy to manage through their regular PAYE submissions.

How Can Employers Claim the Employment Allowance 2025/26?

What Are the Steps to Claim the Employment Allowance via PAYE?

Claiming is simple and can be done through your payroll software:

1. Check your eligibility (use HMRC’s online guidance if unsure).

2. Enable Employment Allowance in your payroll software settings.

3. Submit an Employer Payment Summary (EPS) to HMRC — this notifies them you’re claiming.

4. The allowance will then apply automatically until it’s fully used up or the tax year ends.

💡 Tip: Always keep a copy of your EPS submission confirmation — it serves as proof of your claim if HMRC ever audits your business.

How Long Does It Take for the Employment Allowance to Show on HMRC Records?

After submitting your EPS, HMRC typically updates your business tax account within 5–10 working days. You’ll see the allowance reflected in your PAYE account summary.

If you don’t see it after two weeks, double-check your payroll software settings or contact HMRC’s employer helpline for clarification.

What Happens if You Claim Employment Allowance by Mistake?

If you realise you’ve claimed in error, you should:

• Contact HMRC immediately.

• Correct your EPS for that tax year.

• Repay any overclaimed amount.

Sarah Coles, Tax Analyst at Hargreaves Lansdown;

“Employers should review their payroll settings annually to ensure Employment Allowance eligibility is correctly maintained”

How Does the Employment Allowance Affect Your Payroll and Tax Reporting?

Does the Employment Allowance Reduce PAYE Payments?

Yes, it does — but only the employer’s National Insurance contribution part of your PAYE payment. It won’t affect employees’ tax or NI deductions.

Here’s how it works in practice:

• Each time you run payroll, your employer NI liability is calculated.

• The Employment Allowance is then used to offset that liability.

• Your total PAYE payment to HMRC decreases until the full £5,000 allowance is used up.

This makes it easier to manage cash flow and plan ahead, especially for smaller businesses that operate on tight budgets.

How Should Employers Record Employment Allowance in Their Accounts?

Make sure your bookkeeping software (like Xero, QuickBooks, or Sage) records the allowance as a reduction in NI expense, not as income. Keep a clear audit trail showing:

• The amount claimed.

• The date the EPS was submitted.

• HMRC confirmation.

What Happens if You Exceed the Allowance Mid-Year?

If your business uses the full £5,000 allowance before the end of the tax year, your payroll software automatically stops applying it. You’ll then start paying the full amount of employer NI contributions again.

There’s no penalty or reset needed — the system manages it automatically. Just ensure your software settings are correct and up to date to avoid overclaiming.

What Are the Common Mistakes When Claiming the Employment Allowance 2025/26?

Why Do Some Employers Miss Out on Their Allowance?

Common reasons include:

• Forgetting to reapply each tax year.

• Not enabling the claim in payroll software.

• Misunderstanding connected company rules (if you run multiple businesses).

How Can You Avoid Compliance Errors with HMRC?

To stay compliant:

• Review your company structure every year.

• Keep detailed payroll and NI records.

• Double-check eligibility before submitting your EPS.

How Does the Employment Allowance Interact with State Aid and De Minimis Limits?

What Is the De Minimis State Aid Limit for 2025/26?

Under UK law, the Employment Allowance counts as de minimis state aid. The limit varies depending on your industry, but generally:

• €200,000 over three years for most businesses.

• €100,000 for road transport companies.

• €30,000 for agriculture.

How Do You Report State Aid When Claiming Employment Allowance?

When submitting your Employer Payment Summary (EPS), you’ll be asked to declare that your claim complies with state aid limits. You must:

• Select the correct sector category in your EPS submission.

• Keep written evidence of other aid received.

• Retain these records in case HMRC requests them during an audit.

Failing to declare state aid correctly could result in HMRC revoking your claim or demanding repayment. It’s always better to over-document than under-document when it comes to compliance.

What Are the Benefits and Limitations of the Employment Allowance 2025/26?

What Are the Key Advantages for UK Employers?

• Reduces overall payroll costs.

• Encourages hiring new staff.

• Helps small businesses reinvest in growth.

• Supports charities and community organisations.

What Are the Limitations or Restrictions to Consider?

• Capped at £5,000 per year.

• Must be claimed annually.

• Not available to large employers or public bodies.

• Counts towards de minimis state aid limits.

How Will Future Changes Impact the Employment Allowance After 2025/26?

Is the Government Planning to Increase or Adjust the Allowance?

While there’s no official announcement yet, the Treasury often reviews the Employment Allowance during the Autumn Budget. Future adjustments could target specific sectors or align with inflation.

How Should Employers Prepare for 2026/27?

• Keep an eye on HMRC and GOV.UK updates.

• Review your payroll system each April.

• Check if any new thresholds apply to your business.

Conclusion

The Employment Allowance 2025/26 remains one of the simplest and most effective ways for UK employers to reduce their National Insurance costs. By claiming correctly, you can save up to £5,000 a year, freeing up funds to reinvest in staff or business development.

Always review your eligibility, submit your claim early in the tax year, and keep good payroll records to stay compliant with HMRC rules.

FAQs – Employment Allowance 2025/26

What is the Employment Allowance for 2025?

It’s £5,000, allowing eligible employers to reduce their Class 1 National Insurance bill for 2025/26.

What is the Tax Allowance for 2025–2026?

The Personal Tax Allowance stays at £12,570, the amount individuals can earn before paying income tax.

What is the Employer Rate for 2025?

Employers pay 13.8% National Insurance on employee earnings above £9,100 per year.

How Does the Employment Allowance Work?

It automatically cuts your employer’s NI contributions by up to £5,000 through your payroll each tax year.

What Is the Employment Allowance 2025/26 Eligibility Criteria?

You must have under £100,000 NI liability, employ staff through PAYE, and not be a single-director company.