If you run payroll, you may have seen Employment Allowance in your software and wondered whether it applies automatically. An incorrect claim can distort what you owe HMRC, while a missed claim can leave an eligible employer paying more employer National Insurance than necessary.
For 2026/27, Employment Allowance in the UK can reduce an eligible employer’s secondary Class 1 National Insurance bill by up to £10,500. It is claimed through PAYE, usually by submitting an Employer Payment Summary, or EPS. Here is how to check eligibility, avoid common PAYE mistakes, and deal with a missed claim.
What does Employment Allowance actually reduce?
Employment Allowance reduces the employer Class 1 National Insurance you would otherwise pay through PAYE. For 2026/27, an eligible employer can reduce this liability by up to £10,500 over the tax year, although the amount you actually use depends on how much qualifying employer National Insurance you incur.
It is important to distinguish this from the deductions taken from employees’ pay. Employment Allowance does not reduce employees’ National Insurance or Income Tax, and it does not cover Class 1A or Class 1B National Insurance. Instead, it reduces the qualifying employer Class 1 National Insurance building up through payroll.
Unsure whether the allowance is being applied correctly? A short payroll and eligibility review can help you see what needs attention, without unnecessary jargon. Call us on 01732 387 059 or email .
Who can claim in 2026/27, and where do businesses get caught out?
The eligibility rules became broader from April 2025 because the previous £100,000 employer Class 1 National Insurance liability cap was removed. That does not mean every employer can claim, however. Several exclusions still apply, so it is worth checking the nature of the business and its payroll arrangements before switching the allowance on.
The rules around Employment Allowance for sole directors are often misunderstood because simply having another person on the payroll is not always enough. A limited company cannot claim where its sole director is the only employee for whom secondary Class 1 National Insurance is due. If the company’s circumstances change so that more than one employee or director earns above the Secondary Threshold, it can become eligible for Employment Allowance for the whole tax year.
Connected companies need particular care too. If two or more companies are treated as connected at the start of the tax year, they cannot each make a separate claim. The group must decide which one company will use the allowance, so looking at each payroll in isolation can lead to the wrong answer.
Employment Allowance is simple to apply once eligibility is clear. The bigger risk is treating the PAYE tick box as a substitute for checking who is entitled to claim.
How do you claim through PAYE correctly?
To claim Employment Allowance through PAYE, you normally submit an EPS with ‘Yes’ selected for the Employment Allowance indicator. HMRC’s Basic PAYE Tools can be used if your payroll software does not support the required EPS function.
Making the claim itself is relatively straightforward. The more important part is making sure the payroll reflects the business’s actual circumstances throughout the year.
These three checks are particularly useful:
- Confirm eligibility for the tax year before claiming.
- Nominate only one PAYE scheme if you operate several.
- Recheck the position if directors, employees, ownership, or connected-company arrangements change.
The claim does not simply roll forward from one tax year to the next, so it needs to be made again each year. By contrast, changing payroll software part-way through a tax year does not normally require a fresh Employment Allowance claim, provided the existing PAYE position is transferred correctly.
Our bookkeeping services can help keep the underlying records in order.
What if you missed the allowance?
If you think you may have missed an Employment Allowance claim, it is worth checking before assuming the opportunity has gone. HMRC allows an eligible employer to claim during the tax year and apply the allowance against employer Class 1 liabilities from the start of that year. If those liabilities have already been paid, the claim may create a PAYE credit or repayment.
A missed claim may also be recoverable for earlier years. HMRC allows claims for the previous four tax years, but each year has to be considered under the rules that applied at the time. That matters because the allowance amount and some eligibility conditions have changed, so a business that qualifies now may not necessarily have qualified on exactly the same basis in an earlier year.
For a small business, this reduction in employer National Insurance can be valuable, although it cannot exceed the qualifying employer Class 1 National Insurance due.
Check the claim, not just the payroll setting
The practical check is therefore wider than asking whether Employment Allowance is switched on in your payroll software. You need to know that the business is eligible, that the correct PAYE scheme is claiming it, and that any changes to directors, employees, or connected companies have been taken into account.
If your staffing, directors, or group structure have changed, reviewing Employment Allowance alongside wider tax planning can help keep the PAYE position aligned with your circumstances.
If you are unsure whether your PAYE is using Employment Allowance correctly, call us on 01732 387 059 or email . You can also use our contact page.
Frequently asked questions
How much is Employment Allowance in 2026/27?
It is up to £10,500 for an eligible employer, limited by the qualifying employer Class 1 National Insurance liability.
Can a sole director company claim Employment Allowance?
Not if the sole director is the only employee liable for secondary Class 1 National Insurance. Another qualifying employee or director can change the position.
Do I need to claim every tax year?
Yes. HMRC requires a new claim for each tax year, normally through an EPS.
Can I claim Employment Allowance late?
Yes, if you were eligible. You can claim during the year and can generally claim for the previous four tax years.
Can two connected companies both claim?
No. Where the connected-company rules apply, only one company can claim for that tax year.