Employment Allowance

Last updated: 29 December 2025

Official Definition

According to HMRC, Employment Allowance reduces your business's employer National Insurance bill by up to £5,000 per tax year.

What It Is (Plain English)

Think of Employment Allowance as a £5,000 gift card from HMRC that you can only spend on employer National Insurance. When you pay employees (including yourself as a director), you normally pay 13.8% employer NI on top of their salary. This allowance lets you skip the first £5,000 of that bill.

For contractors, this usually means you can pay yourself (or your partner) a higher salary without the NI cost, making it more tax-efficient than taking dividends.

Quick Facts

Amount: £5,000 per tax year
What it reduces: Employer National Insurance (Class 1 secondary)
Who it helps: Small businesses with employees
Most contractors: NOT eligible (solo director only)

Who IS Eligible?

You qualify for Employment Allowance if you meet ALL of these:

You pay employer National Insurance (Class 1 secondary contributions)
Your total employer NI bill in the previous tax year was less than £100,000
You have at least one employee earning above the secondary threshold (around £9,100/year currently)
You're NOT a company where the director is the only employee (see below)
You're NOT providing services via a personal service company caught by IR35 (off-payroll working)

Who is NOT Eligible?

Most Solo Contractors Are Excluded

If you're the only employee of your limited company, you can't claim Employment Allowance.

This rule excludes most IT contractors, freelancers, and sole directors. HMRC introduced this restriction to prevent contractor companies from benefiting when they're essentially one-person businesses.

You're also excluded if:

Your company only provides domestic or personal services (e.g., nannies, cleaners for a household)
You're caught by IR35 and treated as an employee of your client
Your business's main purpose is public functions (e.g., local authorities)

How Contractors Can Become Eligible

The most common way is to employ your spouse or partner. Here's how it works:

Employing Your Spouse

Before Employment Allowance:

Pay yourself £12,570 (personal allowance)
Employer NI: 13.8% on amount above £9,100 = £479
Take rest as dividends

After Employment Allowance (employing spouse):

Pay yourself £12,570
Pay spouse £12,570
Total employer NI: £958
Employment Allowance covers it: -£958
Net employer NI: £0
Save £958 vs dividends!

Plus your spouse gets: NI credits for State Pension, tax-free salary up to personal allowance.

Requirements for Employing Your Spouse

They must do actual work for the company (not just be on paper)
The work must be genuine and the salary must be reasonable for that work
Keep records of what they do (timesheets, emails, tasks)
They must earn above the secondary NI threshold (around £9,100) - the allowance doesn't help below that
Register them as an employee with HMRC

Alternative: Hiring an Employee

If you need help in your business anyway, hiring a part-time employee or apprentice can make you eligible. The employee needs to earn above £9,100/year (about £175/week) for you to benefit from the allowance.

How Much Can You Save?

Scenario	Salaries Paid	Employer NI (no EA)	With EA	Saving
Solo director	£12,570	£479	£479	£0 (not eligible)
Director + spouse	£25,140	£958	£0	£958
Director + employee	£32,000	£3,160	£0	£3,160
Multiple employees	£80,000	£9,784	£4,784	£5,000 (max)

How to Claim

You claim through your payroll software when you submit your Employer Payment Summary (EPS) to HMRC. Most modern payroll software (Xero, QuickBooks, etc.) has a checkbox for Employment Allowance.

Ensure you meet eligibility criteria
Enable Employment Allowance in your payroll software
HMRC will automatically deduct the allowance from your employer NI bill
You'll see the reduction on your next employer NI payment

You can claim at any point in the tax year - the £5,000 is for the whole year, not divided by month.

Common Questions (FAQ)

I'm a solo contractor - can I claim?

Not unless you employ someone else (spouse, employee, etc.) who earns above the NI threshold. Solo directors are explicitly excluded.

Does my spouse actually have to work, or can they just be on paper?

They must do genuine work. HMRC can investigate, and if they find the employment is a sham, you'll have to repay the allowance plus penalties. Keep records of what they do - admin, bookkeeping, marketing, etc.

What if I have multiple companies?

You can only claim the allowance for one company per tax year. If you have associated companies (common ownership), you must choose which one claims it.

Can I claim it mid-year if I hire someone?

Yes! If you hire your spouse or an employee in October, you can claim the allowance from October onwards. You'll still get the full £5,000 for the year, but it only covers NI from when you started being eligible.

What if my employer NI bill is less than £5,000?

You can't "carry over" the unused amount. If your NI bill is £2,000, you save £2,000. The unused £3,000 doesn't roll to next year.

Does it affect my employee's tax or NI?

No - it only reduces employer NI. Your employees still pay the same income tax and employee NI as before.

What's the optimal salary with Employment Allowance?

With EA, you can pay up to the personal allowance (£12,570 each for you and your spouse) without any NI cost, as long as the total employer NI stays under £5,000. This usually means around £25,000-£30,000 combined salaries is optimal.

Can I claim it if I'm caught by IR35?

No. If you're providing services through your company but IR35 rules apply (you're treated as an employee), you can't claim. This is specifically excluded.