Small business employment allowance: Reduce your National Insurance bill

Published Wednesday 26 November 2025

Table of contents

• What is an Employment Allowance?
• How much can you save with Employment Allowance
• Eligibility for Employment Allowance
• Employment Allowance for the year 2025/26
• How to claim Employment Allowance
• Make Employment Allowance work for your business
• FAQs on Employment Allowance

Key takeaways

• Claim Employment Allowance to reduce your annual National Insurance liability by up to £10,500, which can completely cover the National Insurance costs for many small businesses and significantly improve cash flow.

• Verify your eligibility by ensuring you employ at least one person above the National Insurance threshold who is not just a company director, and confirm you're not excluded due to public sector work or employee type restrictions.

• Submit your claim immediately through compatible payroll software like Xero or HMRC's basic PAYE tools to start reducing National Insurance payments right away without waiting for confirmation.

• Maintain proper records of your Employment Allowance usage for at least three years after the tax year ends, and remember to make a new claim each tax year as the allowance doesn't roll over automatically.

What is an Employment Allowance?

Employment Allowance is a government scheme that lets eligible employers reduce their annual National Insurance liability by up to £10,500. This allowance helps you cut your employment costs and improve your cash flow.

Employment Allowance is different from employment relief. Small Employers' Relief lets you claim back 100% plus an additional 8.5% of employee statutory payments if you qualify.

Benefits of Employment Allowance

Employment Allowance gives you immediate National Insurance relief of up to £10,500 each year. For many small businesses, this covers your entire National Insurance liability.

How it works:

• Start using your allowance as soon as you claim
• Reduce payments without waiting for HM Revenue and Customs (HMRC) confirmation
• Get notified within five working days if your claim is rejected

If you use Xero Payroll, go to Payroll settings and select the HMRC tab. Under 'Will you be claiming Employment Allowance for the following tax years?', choose the relevant tax year.

You can also claim Employment Allowance for previous tax years. The Institute of Chartered Accountants in England and Wales (ICAEW) confirms you have four years from the end of the tax year to make a claim. Use HM Revenue and Customs (HMRC) basic Pay As You Earn (PAYE) tools to do this.

How much can you save with Employment Allowance?

The Employment Allowance lets you reduce your annual National Insurance liability by up to £10,500. This directly lowers your employer contributions bill.

For many small businesses, this saving is significant. If your total Class 1 National Insurance liability for the year is less than £10,500, the allowance could cover it completely. This frees up cash for you to use in your business.

Eligibility for Employment Allowance

Employment Allowance eligibility applies to most small businesses and charities that employ staff. You qualify if you are a registered employer with employees earning above the National Insurance threshold.

Key eligibility requirements:

• Run a small business, charity or community amateur sports club
• Employ at least one person who is not just a company director
• Pay at least one employee above the Class 1 National Insurance secondary threshold

Payments that don't qualify:

• Pay off-payroll workers or contractors
• Employ personal, household or domestic workers (except care workers)

If you use Xero Payroll, off-payroll workers are automatically excluded from the amount claimed.

Who cannot claim Employment Allowance

Businesses excluded from Employment Allowance

Company structure exclusions:

• Do more than 50% public sector work (some exceptions apply)
• Have only one employee above the National Insurance threshold, who is also a company director

Employee type exclusions:

• Employ household, domestic or personal workers (except care workers)
• Use contractors working under IR35 rules
• Employ family members in some family business structures

Employment Allowance for the year 2025/26

For the 2025/26 tax year, you can claim up to £10,500 in Employment Allowance, up from the previous £5,000.

You can claim the allowance at any time during the tax year through your payroll software or HM Revenue and Customs (HMRC) basic Pay As You Earn (PAYE) tools. The earlier you claim, the sooner you save.

Check the latest HMRC guidance each year, as rules and amounts can change.

How to claim Employment Allowance

You can reduce your National Insurance payments by following these six steps. Use payroll software like Xero or HM Revenue and Customs (HMRC) basic Pay As You Earn (PAYE) tools to claim.

1. Check your eligibility

Firstly, make sure your business or charity meets the eligibility criteria. You'll need at least one employee who isn't a company director and who is paid above the Class 1 National Insurance secondary threshold. Use the previous section of this guide and the HMRC guidance to check your eligibility.

2. Verify you're not excluded

Businesses excluded from Employment Allowance:

Company structure exclusions:

• Public sector: Businesses doing more than 50% public work are generally excluded, although some exceptions apply.
• Single director companies: Companies where the only employee above the NI threshold is also a company director

Employee type exclusions:

• Personal staff: Household, domestic, or personal workers (except care workers)
• Off-payroll workers: Contractors working under IR35 rules
• Family members: In some family business structures

3. Confirm your software compatibility

Make sure your payroll software has Employment Allowance claim functionality. Most payroll software providers have updated their systems to accommodate the process.

Xero Payroll features let you claim Employment Allowance and report to HM Revenue and Customs (HMRC) each tax year. See the step-by-step guide to claiming Employment Allowance in Xero Payroll.

4. Submit your claim with Xero

Claiming Employment Allowance with Xero takes less than two minutes through your payroll settings:

Step-by-step process:

1. Access settings: Navigate to Payroll > Payroll Settings
2. Find HMRC tab: Select the 'HMRC' tab
3. Select tax year: Choose the relevant year under Employment Allowance options
4. Save changes: Click 'Done' then 'Save' to activate

5. Keep payroll records

After claiming Employment Allowance successfully:

Immediate benefits:

• Instant savings: National Insurance payments reduce immediately
• Automatic tracking: Allowance applies until £10,500 is reached or tax year ends
• No manual calculations: Payroll software handles the reductions automatically

Record-keeping requirements:

• Usage tracking: Monitor how much allowance you've used
• Payment summaries: Keep payroll reports showing allowance applications
• Annual records: Maintain documentation for HMRC compliance, as businesses must keep records related to their claim for a minimum period of three years after the end of the relevant tax year.

Find out more about the records you need to keep for Employment Allowance on the HMRC website.

6. Seek professional advice if needed

Speak with an accountant or bookkeeper if you need support or advice about Employment Allowance. Once your claim is approved, you can access Employment Allowance easily with the right payroll software.

Make Employment Allowance work for your business

Claiming Employment Allowance helps you reduce your payroll costs and improve your cash flow. With the right tools, the process is straightforward.

Using payroll software like Xero makes it easy to claim the allowance and keeps your records up to date. This gives you more time to focus on running your business. Try Xero for free.

FAQs on Employment Allowance

Here are answers to some common questions about the Employment Allowance.

What happens if my Employment Allowance claim is rejected?

If your claim is rejected, HM Revenue and Customs (HMRC) will send you an automated message, usually within five working days. Review the eligibility criteria to find out why your claim was rejected. Once you have corrected any issues, submit your claim again through your payroll software.

Can I claim Employment Allowance for previous tax years?

Yes, you can make a claim for the previous four tax years. Use HM Revenue and Customs (HMRC) basic Pay As You Earn (PAYE) tools or your payroll software to submit a separate claim for each year.

What's the difference between Employment Allowance and Small Employers' Relief?

Employment Allowance reduces your overall employer Class 1 National Insurance bill. Small Employers' Relief lets you reclaim a percentage of statutory payments you make to employees, such as for maternity, paternity or adoption leave.

How does Employment Allowance work if I have multiple companies?

If you have more than one company and they are connected (for example, under the same control), only one company can claim Employment Allowance. You need to decide which company will make the claim.

When does my Employment Allowance expire?

Your Employment Allowance runs for one tax year, from 6 April to 5 April. It does not roll over, so you need to make a new claim each tax year you are eligible.