Employment Allowance: a guide for small businesses

Published Wednesday 27 May 2026

Table of contents

• What is Employment Allowance?
• How much can you save with Employment Allowance?
• Eligibility for Employment Allowance
• Employment Allowance for the year 2026/27
• 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 lets eligible UK employers reduce their annual National Insurance liability by up to £10,500. For many small businesses, this covers the full cost and frees up cash flow.
• You qualify if you employ at least one person above the National Insurance threshold who is not solely a company director, and you're not excluded due to public sector work or certain employee type restrictions.
• Submit your claim through payroll software or HM Revenue and Customs (HMRC) basic Pay As You Earn (PAYE) tools. Your National Insurance payments start reducing straight away, without waiting for confirmation.
• You need to make a fresh claim each tax year because the allowance does not roll over. Keep records of your claim 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 100% plus an additional 3% of employee statutory payments, such as maternity or paternity pay, 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 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.
• You'll be notified within five working days if your claim is rejected.

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 to backdate a claim. Use HMRC basic 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.

With employment costs continuing to climb, wages at UK small businesses grew 2.7% year-on-year in late 2025, according to Xero Small Business Insights. 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, training 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.

Key eligibility requirements:

• You run a business, charity or community amateur sports club.
• You employ at least one person who is not 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 cannot claim Employment Allowance

Some businesses are excluded from claiming Employment Allowance, even if they meet the general criteria above.

Company structure exclusions:

• Public sector work. Businesses doing more than 50% public work are generally excluded, although some exceptions apply.
• Single director companies. Companies where the only employee above the National Insurance threshold is also a company director cannot claim.

Employee type exclusions:

• Personal staff: household, domestic or personal workers, except care workers.
• Off-payroll workers: contractors working under IR35 rules.
• Family members: certain family business structures may be excluded.

Employment Allowance for the year 2026/27

For the 2026/27 tax year, you can claim up to £10,500 in Employment Allowance, the same amount as the previous year. The allowance continues to apply against your employer Class 1 National Insurance liability.

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.

From 2026/27, de minimis state aid restrictions no longer apply to Employment Allowance claims in Great Britain. If your business trades in goods in Northern Ireland, separate rules may still apply. 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 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:

• Public sector work. If more than 50% of your work is for public bodies, you're generally excluded.
• Single director companies. If the only employee above the National Insurance threshold is also a director, you cannot claim.
• Personal or household staff. Employment of domestic workers, except care workers, is excluded.
• Off-payroll workers. Contractors operating under IR35 rules don't count.

3. Confirm your software compatibility

Check that your payroll software supports Employment Allowance claims. Most providers have updated their systems to handle the process.

Xero Payroll lets you claim Employment Allowance and report to HMRC each tax year. Your claim is submitted via an Employment Payment Summary (EPS). This is 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 Employment 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 straight away. The allowance applies automatically until the full £10,500 is used or the tax year ends.

You should keep the following records:

• Usage tracking. Monitor how much of your allowance you've used throughout the year.
• Payment summaries. Keep payroll reports showing when and how the allowance was applied.
• Annual records. Maintain documentation for at least 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

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

Your circumstances may change during the tax year, and this can affect your Employment Allowance claim. 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. Contact HMRC and update your payroll software to reflect the change. You can keep the allowance you've already received up to that point.

If you've claimed Employment Allowance incorrectly, HMRC may recover the overpayment and charge interest. In serious cases, penalties can apply. 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. Speak with your accountant if you're unsure how connected company rules apply to your situation.

Simplify your payroll with Xero

Sales at UK small businesses rose just 2.9% year-on-year in early 2026, the smallest increase in two years, according to Xero Small Business Insights. With revenue 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, submit your EPS to HMRC and keep your records organised. This gives you more time to focus on running your business, so get one month free.

FAQs on Employment Allowance

Here are answers to frequently asked questions about Employment Allowance.

What happens if my Employment Allowance claim is rejected?

HMRC will notify you within five working days with the reason for rejection. 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. You'll need to submit a separate EPS for each year, and HMRC will either offset the refund against future liabilities or pay 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.

How does Employment Allowance work if I have multiple companies?

If you have more than one company and they're connected, only one company in the group can claim. Decide which company benefits most and speak with your accountant if you're unsure.

What is an Employment Payment Summary?

An EPS is sent automatically by your payroll software each time you run payroll. 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 does not roll over. Submit a new claim at the start of each tax year to start reducing your National Insurance payments as soon as possible.