- Employment Allowance 2026-27: £10,500 (up from £5,000 pre-April 2025)
- Sole director companies (director is only employee): cannot claim
- Add a second genuine employee and the company becomes eligible
- It offsets employer NI due — not a cash payment
- Use-it-or-lose-it: no carry-forward of unused allowance
What is the Employment Allowance?
The Employment Allowance (EA) reduces an eligible employer's employer National Insurance liability by up to £10,500 per tax year (2026-27). It is not a cash grant — it is an offset against employer NI payments due throughout the year. If your total employer NI bill for the year is £8,000, the EA eliminates it entirely. If it is £15,000, you pay £4,500 after the EA offsets the first £10,500.
Who can claim — and who cannot
| Employer type | EA eligible? | Reason |
|---|---|---|
| Company with director + at least 1 other employee | Yes | Not a sole-director company |
| Sole director company (director is only employee) | No | Specifically excluded |
| Company whose employer NI exceeded £100,000 last year | No | Turnover/size exclusion |
| Company connected to one that already claimed EA | No | Anti-avoidance: one EA per group |
| Public authority (NHS, local council, etc.) | No | Excluded category |
The sole director exclusion in detail: A company where the director is the only employee who earns above the Secondary Threshold cannot claim. If the director is the only person on the payroll at any salary level, the exclusion applies. This is regardless of whether other people do work for the company as contractors or self-employed individuals — payroll is what counts.
How to become eligible
If you currently have a sole-director company and want to access the Employment Allowance, you need at least one other employee on the payroll at or above the Secondary Threshold (£5,000/year). Options that genuinely work:
- Employ a spouse, partner, or family member for genuine work at a commercial rate
- Take on a part-time member of staff for genuine business tasks
HMRC scrutinises connected-party employment arrangements. A salary paid to a spouse or family member must reflect the actual work done at a rate that would be paid to an arms-length employee. Paying a spouse £5,001/year for minimal work solely to trigger the EA eligibility is a risk — the deduction for the salary could be challenged if the work cannot be evidenced.
How to claim the Employment Allowance
- In your payroll software, tick the Employment Allowance indicator (or equivalent setting)
- This generates an Employer Payment Summary (EPS) submission to HMRC indicating your EA claim
- HMRC applies the allowance from the start of the tax year
- Your monthly employer NI payments are reduced (or eliminated) until the £10,500 is used up
- You must re-confirm the claim at the start of each new tax year
Impact on director salary strategy when EA is available
When the Employment Allowance is available, the employer NI cost on director salary is effectively zero for the first £70,000 of employer NI (£10,500 ÷ 15%). This fundamentally changes the salary vs dividends analysis:
| Scenario | Without EA (sole director) | With EA (eligible company) |
|---|---|---|
| Employer NI on £12,570 director salary | £1,135.50 | £0 (covered by EA) |
| Net company cost to pay £12,570 salary | ~£11,100 | ~£10,200 (better CT saving, no employer NI cost) |
| Could salary go higher efficiently? | No — employer NI bites above £5,000 | Potentially yes — model salary to basic rate threshold |
Worked example: EA-eligible company, higher salary
Director on £20,000 salary, EA-eligible company:
| Item | Amount |
|---|---|
| Gross salary | £20,000 |
| Employer NI (£15,000 × 15%) | £2,250 |
| Employment Allowance offset | −£2,250 (fully covered) |
| Employer NI actually paid | £0 |
| CT deduction on £20,000 salary | −£3,800 (at 19%) |
| Net company cost | £16,200 |
| Income tax on £7,430 (above £12,570 PA) at 20% | £1,486 paid by director |
| Director's net take-home | £18,514 |
The company spends £16,200 net and the director receives £18,514 — an efficiency benefit over taking the same amount purely as dividends. Compare to a sole director company where the employer NI would have been £2,250 unmitigated.
EA claim in payroll software
Most payroll software (FreeAgent, Xero, QuickBooks, Sage, HMRC Basic PAYE Tools) has a simple toggle or checkbox to claim the Employment Allowance. The claim is submitted via an EPS and takes effect from the start of the tax year. If you forget to claim at the start of the year, you can claim retrospectively — the missed EA reduces future employer NI payments or generates a repayment.
Use the calculator
Frequently asked questions
Can I claim if my spouse is also an employee?
Is the Employment Allowance taxable income?
Can I carry forward unused Employment Allowance?
What if I claimed EA but then realise I was not eligible?
Can I claim EA if I pay myself through a management service company?
Important: This guide is for general information only and does not constitute tax or legal advice. Tax rules change — always verify current rates and thresholds with HMRC or a qualified accountant before making decisions.