Employment Allowance 2025-26 Eligibility

With the announcement of the 2024 Autumn Budget last week by Chancellor Rachel Reeves, there has been significant interest in the changes coming to employers’ National Insurance contributions and employment allowance eligibility. Alongside this, businesses should consider how these changes align with potential shifts in other taxes, such as capital gains tax, which could further impact financial planning for the upcoming year.

The increase in employers’ NICs is expected to have a considerable impact on a large number of employers across the UK, as it is anticipated to raise £25 billion in revenue for the government over five years.

In today’s blog post, I want to take a look at these changes in more detail to help you understand how they may affect your business taxes in 2025. Its a bit of a deep dive, and if you want to cut straight to the chase, see the section “Practical Examples” below.

To quickly recap, starting in April 2025, (a) the employment allowance will increase from £5,000 to £10,500, (b) the rate of employers NIC increases from 13.8% to 15%, and (c) the tax-free employers NIC band drops from £9,100 to £5,000 per employee.

Introduction

Firstly, lets cover off what we are talking about here. The employment allowance was introduced in the UK to encourage businesses to hire more employees and support economic growth by reducing the cost of employing staff. It was announced in the 2013 Budget by Chancellor George Osborne and came into effect on 6 April 2014. This allowance was designed to help small businesses by reducing their employer National Insurance contributions by up to £2,000 initially.

The 2024 Autumn Budget has introduced significant updates to the employment allowance and employers NIC framework for the 2025 tax year. These changes are poised to make a substantial impact on how businesses manage their finances.

It seems clear that the increase in the employment allowance was implemented to help offset the additional costs to small employers from the increase in the employer NIC rates, which are also announced to take effect in April 2025. Larger employers won’t feel any relief from the employment allowance increase and will largely be the ones contributing extra taxes to the government coffers.

Maintaining accurate records for employment allowance claims is crucial for tax compliance. Businesses must keep documentation for three years and follow the process of submitting claims through payroll systems to ensure timely submissions and adherence to HMRC regulations.

You will be able to see in our scenarios below how the overall impact of the employment allowance changes, and the employer’s NIC rate changes combine, and what the overall tax impact for businesses will be.

What is Employment Allowance?

The employment allowance, a government initiative, allows eligible employers to reduce their annual National Insurance contributions. Designed to support smaller businesses, this allowance provides financial flexibility for investment in operations and workforce.

From April 2025, the employment allowance will increase to £10,500, as announced in the latest budget statement. This significant increase reflects the government’s commitment to easing the financial burden on businesses, enabling them to thrive in an increasingly competitive environment, in reality is just helps some small business avoid the worst impacts of the increase in employers NIC.

Historically, the employment allowance has evolved to adapt to the changing economic landscape. Initially introduced to support small businesses by reducing employment costs, it has been periodically adjusted to reflect the needs of employers and the broader economy. The allowance has been vital in helping businesses manage payroll expenses, facilitating growth and stability over the years.

Employers can use HMRC’s Basic PAYE Tools to claim the employment allowance if their payroll software lacks the necessary features.

Key Changes Announced in the 2024 Autumn Budget

The 2024 Autumn Budget has brought several key changes that will reshape the employment allowance framework starting April 2025. A major update is the increase in the employment allowance from £5,000 to £10,500, doubling the relief for eligible employers.

In addition, the budget has removed the previous £100,000 eligibility threshold, allowing more employers to benefit from the allowance. This change is particularly impactful for medium and large enterprises that were previously excluded from claiming the allowance due to their higher National Insurance liabilities.

Additionally, the employer National Insurance contributions rate will increase by 1.2 percentage points, from 13.8% to 15%, starting April 2025. And at the same time, the threshold for when employers are required to pay National Insurance will decrease from £9,100 to £5,000. The increase in employer’s national insurance contributions will significantly impact businesses, especially those employing contractors through PAYE Umbrella companies, as it will reduce the net pay contractors receive from their timesheet income.

These changes can be seen as further complicating an already complicated tax system. By increasing the employment allowance to £10,500 while simultaneously raising employer National Insurance rates and reducing the tax-free employer NIC band, the government is introducing measures that, on the surface, seem to offer financial relief to businesses but actually add layers of complexity. This kind of fiscal tinkering contributes to the challenge for employers who must navigate an ever-changing tax landscape.

My feeling is these adjustments reflect a pattern of incremental policy shifts that, while aiming to address specific issues, end up creating more administrative burdens for businesses. As a result, the tax code becomes increasingly convoluted, making it harder for employers to plan and budget for their staffing costs. The interplay between increasing allowances and raising tax rates or lowering thresholds exemplifies how political interventions can lead to a tax system that is less transparent and more challenging to navigate. Rant over.

Eligibility Criteria for Employment Allowance in 2025

To claim employment allowance in 2025, employers must meet specific eligibility criteria. With the removal of the £100,000 threshold, most employers, regardless of size, will be able to claim the allowance in 2025.

Eligibility criteria include being registered as an employer and employing staff. You must be a registered employer, operating as a business or charity (including community amateur sports clubs).

There are also a number of exclusions that I feel need their own section, so see more detail on this below.

Exceptions to Employment Allowance Eligibility

While the employment allowance offers significant benefits, there are notable exceptions to eligibility.

For instance, employees deemed to fall under IR35 rules or those working in domestic settings, such as nannies, are excluded from the employment allowance calculation. Payments to off-payroll workers do not count towards the National Insurance liability total for eligibility.

For companies with just working directors and no employees (which is the most common scenario for our clients), there are specific exclusions. In cases like this, at least two directors must earn above the Secondary Threshold for Class 1 National Insurance contributions, set to be reduced to £5,000 per year from April 2025. This criterion aims to limit allowance eligibility by excluding single-director companies which seems a bit out of step these days. When the employment allowance was first introduced in 2014, dividends were still lightly taxed compared to now. The exclusion of single-director companies these days seems to be more a hangover from old policy than anything else.

There are other exclusions also that i wanted to mention briefly though they don’t really impact our client base at all. Firstly, Businesses in Northern Ireland, particularly those involved in manufacturing or selling goods, must consider de minimis state aid limits, which can restrict their ability to claim the allowance.

Also, public sector organisations or those primarily working on public sector contracts are generally ineligible unless they are charities or meet specific criteria. This ensures that public funds are not double counted through the allowance.

How to Claim Employment Allowance

Claiming the employment allowance is straightforward and integrated into regular payroll activities. Include the employment allowance in your Real Time Information (RTI) submission to HMRC to claim it. This can be done at any time during the tax year, ensuring flexibility for employers.

Most payroll software systems have an option to indicate ‘Yes’ in the ‘employment allowance indicator’ field. This is done when submitting your Employer Payment Summary (EPS) to HMRC. If your payroll software lacks this feature (unlikely these days), HMRC’s Basic PAYE Tools can be used to make the claim efficiently.

You can start using the employment allowance immediately after submitting your claim, with no waiting period. If denied, HMRC will notify you within five working days, and their Employer Helpline can provide support. If you claimed employment allowance in the previous tax year, be sure to review any eligibility changes for 2025 to ensure continued compliance.

If you become ineligible during the tax year, discontinue your claim by selecting ‘No’ in the employment allowance indicator field in your next EPS submission. This ensures compliance with HMRC regulations and avoids potential penalties.

Claiming for Previous Tax Years

Claiming Employment Allowance for previous tax years is possible, but there are certain rules and limitations to be aware of. If you’re eligible for the allowance, you can claim it for the current tax year and also for previous tax years, but only up to a maximum of four years. To claim for previous years, you’ll need to submit a separate Employment Payment Summary (EPS) for each year you’re claiming for.

When claiming for previous years, you’ll need to ensure that you meet the eligibility criteria for each year you’re claiming for. This includes having a Class 1 National Insurance liability for the year in question and not being excluded from the scheme. You’ll also need to keep accurate records of your claims, including the amount of allowance claimed and the tax year it relates to.

It’s worth noting that the maximum Employment Allowance has changed over the years, so you’ll need to ensure that you’re claiming the correct amount for each year. For example, the maximum allowance was £2,000 for the 2014/15 tax year, increasing to £3,000 for the 2016/17 tax year, and then to £5,000 for the 2020/21 tax year. From April 2025, the maximum allowance will increase to £10,500.

Practical Examples

Here are a few practical examples of how employment allowance can be applied.

Scenario 1: A single Director limited company contractor.

In 2024, for a single director working through their own limited company, the most common annual salary was £9,096. At this level, the salary did not attract any Employers’ National Insurance because it was below the tax-free band, and the salary also suffered no employee tax deductions, such as PAYE employees’ National Insurance contributions. This keeps the salary operation straightforward, allowing a simple net payment to be made from the limited company to the director each month for the same amount.

In 2025 however, the tax-free threshold for Employers’ National Insurance drops to £5,000. The contractor will need to decide whether to take a lower salary and higher dividends (paying more dividend tax) or a higher salary with Employers’ NIC. Regardless of the choice, there will be an increased overall tax burden for the single-director limited company contractor of at least £260 per year, which is not insignificant.

Scenario 2: A limited company contractor pays both herself and her spouse a salary.

With two directors working through the same limited company, where they want to take advantage of the Employer’s Allowance, the most tax-efficient salary for the 2025 tax year will generally be £12,570 per year for each person.

The first £5,000 of each salary will be free of Employers’ National Insurance. The overall Employers’ National Insurance tax bill for these salaries would amount to £2,271 for the year. However, because there are two directors working, it will be eligible to claim the Employer’s Allowance of up to £10,500.

In this case, the business will pay no Employers’ National Insurance at all. Effectively, each director will receive an annual salary of £12,570, completely free of any National Insurance or pay deductions.

For directors who draw both salary and dividends, income tax planning remains essential for optimising their personal tax positions.

For Scenario 1, the Autumn Budget announcement will make no difference to the overall tax planning, because, in the 2024 tax year, the Employer’s Allowance of £5,000 already covers any Employers’ National Insurance liability.

Scenario 3: A contractor working through a PAYE Umbrella company

As contractors working through an umbrella company know, their timesheet income, billed to their agency or end client at the agreed contract rate, funds all employment-related taxes, including Employer’s National Insurance, the Apprenticeship Levy, and any employer pension contributions.

At our umbrella company, No Worries Red Umbrella Limited, the process is straightforward. From the timesheet income a contractor generates, we retain £22.50 as our fee, and the remaining income is allocated to (a) HMRC for tax obligations, (b) the contractor’s pension fund (if applicable), and (c) the contractor’s personal bank account as after-tax net pay.

Since Employer’s National Insurance is deducted from the timesheet income, any increase in this tax will reduce the gross pay available for the contractor. For example, with all other factors being equal, an umbrella worker earning £25 per hour would see a reduction in their net pay of approximately £12 per week, while a worker earning £500 per day would see a net pay reduction of around £18 per week.

Scenario 4: A small business employs 6 workers paying them an average of £12.50 per hour.

In this scenario, let’s say we have a director paying themselves £12,570 per year in salary and six employees earning above the national minimum wage at £12.50 per hour working 1,840 hours per year.

For the 2024 tax year, the overall employer’s liability, taking into account the existing £5,000 Employer Allowance, is £6,988 for the year.

If we bring this scenario forward to the 2025 tax year, with individuals paid the same amounts, the National Insurance due increases by around £5,000. However, with the employment allowance is now also raised to £10,500, and so the employer would actually end up paying slightly less Employers’ National Insurance of £6,835.

Scenario 5: A medium-sized business employs 150 workers paying them an average salary of £38,000 per year.

In this scenario, you can see the real impact of the Employers’ National Insurance changes, with a clear example of how the government expects to raise extra revenue.

Let’s look at 2024 first of all. For a business that employs 150 workers, each paid an average of £38,000 per year, the business is not eligible for the Employer’s Allowance under the current rules and would pay £598,230 per year in Employers’ National Insurance.

Now, if we bring this forward to 2025, with the same number of employees and the same pay rate, the business becomes eligible for the Employer’s Allowance due to the removal of the £100,000 eligibility criterion. However, the Employers’ National Insurance bill is now much higher for the 2025 tax year.

This medium-sized employer can expect to pay £732,000 in Employers’ National Insurance, representing an increase of £133,770 per year (or 22%) and introducing a significant new additional tax burden for the company.

Summary

Starting April 2025, the Employment Allowance can significantly reduce National Insurance contributions for small businesses, providing up to £10,500 in relief. We are told this support helps businesses manage payroll expenses and invest in growth and development, but what we’ve seen in the scenarios above is that the increase in the Employer’s Allowance simply shields some small employers from the rise in Employers’ National Insurance rates.

Frequently Asked Questions

What is the Employment Allowance?

The Employment Allowance is a government initiative designed to help eligible employers reduce their annual National Insurance contributions, primarily aimed at small businesses. Starting from April 2025, it will increase to £10,500 per year. As it stands, the increase in the Employment Allowance simply shields small employers from the worst effects of the rise in employers NIC rates.

What are the major changes to Employment Allowance in 2025?

The main changes include the increase in the Employment Allowance to £10,500 and the removal of the £100,000 NIC threshold, which allows more businesses, including larger employers, to benefit from this allowance.

How will the changes in employers NIC rates affect my business?

Alongside the Employment Allowance increase, employer NIC rates will rise from 13.8% to 15%, and the NIC-free threshold will reduce to £5,000. This combination will increase tax liabilities for most businesses who employ more than around 6 people.

Can I claim the Employment Allowance if I am the only director of my company?

Single-director companies without employees are not eligible for the Employment Allowance. For eligibility, companies must have at least two directors earning above the NIC Secondary Threshold. This largely appears to be a hangover from old policy relating to when the employers allowance was first introduced in 2014, and I think the relevance of this exclusion these days in tenuous.

How do I stop claiming Employment Allowance if I become ineligible?

To stop claiming Employment Allowance due to ineligibility, you simply update your payroll submission to accurately reflect your new status. This automatically ensures compliance and prevents any incorrect claims.