Employment Allowance: a guide for small businesses

Published Friday 6 November 2026

Table of contents

• What is Employment Allowance?
• How much can you save with Employment Allowance?
• Eligibility for Employment Allowance
• Employment Allowance 2026/27: how much and who can claim
• How to claim Employment Allowance
• What to do if your eligibility changes
• Simplify your payroll with Xero
• FAQs on Employment Allowance

Key takeaways

• Employment Allowance cuts eligible UK employers' annual National Insurance bill by up to £10,500. For many small businesses, that covers the full cost.
• You need at least one employee paid above the National Insurance threshold who isn't solely a director. Public sector and certain employee type exclusions apply.
• Claim through payroll software or HM Revenue and Customs (HMRC) Basic Pay As You Earn (PAYE) Tools. Your National Insurance payments drop straight away.
• Claim again each tax year, as the allowance doesn't roll over. Keep claim records for at least three years after the tax year ends.

What is Employment Allowance?

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

As an employer, you pay Class 1 National Insurance contributions (NICs) on each employee's earnings above the secondary threshold. For the 2026/27 tax year, the employer NIC rate is 15% on earnings above £5,000. Employment Allowance offsets part or all of that bill, so you keep more of your revenue.

Employment Allowance is different from Small Employers' Relief. Small Employers' Relief lets you reclaim 109% of statutory payments, such as maternity or paternity pay, if you paid £45,000 or less in Class 1 National Insurance in the last complete tax year.

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 the entire National Insurance liability.

Claiming early means you start saving straight away:

• You start reducing payments as soon as you submit a claim
• You don't need to wait for HMRC confirmation before your payments decrease
• HMRC will tell you within five working days if it rejects your claim

You can also claim the allowance for previous tax years. HMRC lets you backdate a claim by up to four tax years. You can do this through your payroll software or HMRC Basic PAYE Tools.

How much can you save with Employment Allowance?

You can save up to £10,500 a year on your employer National Insurance with Employment Allowance. This directly lowers your employer contributions bill.

According to Xero Small Business Insights, wages at UK small businesses grew 2.5% year-on-year in the September quarter of 2026. With employment costs continuing to climb, this allowance can make a meaningful difference to your bottom line.

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 reinvest in your business, whether that means hiring or upgrading equipment.

Eligibility for Employment Allowance

Most small businesses and charities that employ staff can claim Employment Allowance. You qualify if you're a registered employer with employees earning above the National Insurance threshold.

These are the key eligibility requirements:

• You run a business, charity or community amateur sports club
• You employ at least one person who isn't solely a company director
• You pay at least one employee above the Class 1 National Insurance secondary threshold (£5,000 for 2026/27)

From April 2025, the previous £100,000 National Insurance liability cap was removed. This means larger employers can now claim too, as long as they meet the other criteria. The change remains in effect for 2026/27.

Payments for off-payroll workers or contractors don't count towards your eligibility. Employers of personal, household or domestic workers are also excluded, except where those workers are care workers.

Who can't claim Employment Allowance

Some businesses can't claim the allowance, even if they meet the general criteria above. The exclusions fall into two groups.

Company structure exclusions:

• Businesses doing more than 50% public sector work are generally excluded, unless they're a charity
• Companies where the only employee above the National Insurance threshold is also a company director can't claim

Employee type exclusions:

• Household, domestic or personal workers don't count, except care workers
• Contractors working under IR35 rules don't count

Employment Allowance 2026/27: how much and who can claim

In 2026/27, eligible employers can claim Employment Allowance against their employer Class 1 National Insurance bill. Here's how much it's worth and who qualifies:

• You can reduce that bill by up to £10,500 this tax year
• You can claim as a larger employer, because the £100,000 liability cap hasn't applied since 2025/26
• You must be a business, charity or community amateur sports club, with less than half your work in the public sector
• You need at least one employee liable for secondary Class 1 National Insurance who isn't the sole director

If you're checking past years, the allowance was also £10,500 for 6 April 2025 to 5 April 2026.

You can claim the allowance at any time during the tax year through your payroll software or HMRC Basic PAYE Tools. The earlier you claim, the sooner you start saving. Check the latest HMRC guidance each year, as rules and amounts can change.

How to claim Employment Allowance

You claim Employment Allowance in six steps, and your National Insurance payments start reducing once your claim is active. Use payroll software like Xero or HMRC Basic PAYE Tools to submit your claim.

1. Check your eligibility

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 eligibility section of this guide and the HMRC guidance to confirm you qualify.

2. Verify you're not excluded

Review the exclusion criteria to make sure your business isn't disqualified. Pay attention to these common areas:

• If more than 50% of your work is for public bodies, you're generally excluded
• If the only employee above the National Insurance threshold is also a director, you can't claim
• You can't claim for domestic workers, except care workers
• Contractors operating under IR35 rules don't count

3. Confirm your software compatibility

Check that your payroll software supports these claims. Look for an Employment Allowance indicator in its Employer Payment Summary settings.

Xero Payroll lets you claim Employment Allowance and report to HMRC each tax year. It submits your claim via an Employer Payment Summary (EPS), the form your payroll software sends to HMRC alongside your regular submissions.

See the step-by-step guide to claiming Employment Allowance in Xero Payroll on Xero Central.

4. Submit your claim

Claiming the allowance with Xero takes less than two minutes through your payroll settings. Go to Payroll, then Payroll Settings, and select the HMRC tab. Choose the relevant tax year under the Employment Allowance options, then click Done and Save to activate your claim.

5. Keep payroll records

Once your claim is active, your National Insurance payments reduce immediately. The allowance applies automatically until the full £10,500 is used or the tax year ends.

You should keep the following records:

• Track how much of your allowance you've used throughout the year
• Keep payroll reports showing when and how the allowance was applied
• Keep documentation for at least three years after the end of the relevant tax year

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

6. Seek professional advice if needed

If you're unsure about any part of the process, speak with an accountant or bookkeeper. They can help you confirm your eligibility and make sure your claim is correct. Once your claim is active, your payroll software handles the reductions automatically.

What to do if your eligibility changes

If your eligibility changes during the tax year, you may need to stop claiming Employment Allowance. Knowing what to do helps you stay compliant and avoid penalties.

If you become ineligible mid-year, for example because your only non-director employee leaves, you must stop claiming. Select ‘No’ in the Employment Allowance indicator field in your next EPS. If you stop your claim before the tax year ends on 5 April, HMRC removes the allowance you've been given that year and you pay the employer Class 1 National Insurance due.

If you've claimed when you weren't eligible, you'll need to pay the employer Class 1 National Insurance the allowance shouldn't have covered. It's better to review your eligibility at the start of each tax year and whenever your workforce changes.

For connected companies, only one company in the group can claim. If you restructure or add new companies, review which entity should hold the claim and decide which company benefits most. Speak with your accountant if you're unsure how connected company rules apply to your situation.

Simplify your payroll with Xero

According to Xero Small Business Insights, sales at UK small businesses grew 4.0% year-on-year in the September quarter of 2026, less than half the historical average of 8.4%. With sales growth slowing, reducing your payroll costs matters more than ever.

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

Xero Payroll makes it simple to claim the allowance and submit your EPS to HMRC, with your payroll records kept organised. Get one month free and spend more time running your business.

FAQs on Employment Allowance

Here are answers to frequently asked questions about Employment Allowance.

How do I claim Employment Allowance?

You claim through your payroll software by following these steps:

1. Confirm you're eligible
2. Put ‘Yes’ in the Employment Allowance indicator field in your payroll software
3. Send your EPS to HMRC
4. Pay less employer National Insurance each pay run until the £10,500 is used or the tax year ends

If your software has no EPS field, you can claim using HMRC's Basic PAYE Tools instead.

What happens if my Employment Allowance claim is rejected?

If HMRC rejects your claim, you'll get an automated message within five working days. Review the eligibility criteria, correct any issues and resubmit through your payroll software.

Can I claim Employment Allowance for previous tax years?

Yes, you can go back up to four tax years by submitting a separate EPS for each year. HMRC then offsets the refund against future liabilities or pays it back to you.

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

Employment Allowance reduces your overall employer Class 1 National Insurance bill by up to £10,500. Small Employers' Relief lets you reclaim a percentage of statutory payments such as maternity or paternity pay, and you may be able to claim both.

What is an Employer Payment Summary?

An EPS is the submission your payroll software sends to HMRC when you need to report reductions to what you owe. It tells HMRC about reductions to your bill, including Employment Allowance, so your liability updates without a separate notification.

Do I need to claim Employment Allowance every year?

Yes, Employment Allowance runs from 6 April to 5 April and doesn't roll over. Submit a new claim at the start of each tax year to start reducing your National Insurance payments as soon as possible.