Employment Allowance: £10,500 NI Saving for SMEs (2026-27)

If you run a small business or charity and employ staff, Employment Allowance can cut your employer National Insurance bill by up to £10,500 every tax year—a significant saving that many eligible employers still miss. From 6 April 2026, the allowance rose from £5,000 to £10,500, meaning businesses paying employer's Class 1 National Insurance contributions can reduce their liability substantially, sometimes wiping it out entirely. You claim it through your payroll software each year, but you must meet certain conditions: you need employees (not just yourself as a director), your previous year's employer NI bill must be under £100,000, and you can't be a public sector employer. This guide explains exactly who qualifies, how to claim, what the real-world savings look like, and the common mistakes that trip people up.

What is Employment Allowance?

Employment Allowance (EA) is a government scheme that reduces the amount of employer's Class 1 National Insurance contributions you pay on your employees' earnings. It was introduced in April 2014 to ease the burden on smaller employers and encourage job creation.

For the 2026-27 tax year, the allowance stands at £10,500. This means if your business owes, say, £12,000 in employer NI for the year, you'll only pay £1,500 once the allowance is applied. If you owe £8,000, you pay nothing—the allowance covers it all.

Employer's Class 1 NI is the contribution you pay on top of your employees' wages. For 2026-27, the rate is 13.8% on earnings above the Secondary Threshold (currently £9,100 per employee per year). This is separate from the NI your employees pay through their own payslips.

The allowance applies to your total employer NI bill across all employees, not per employee. So if you employ five people and your combined employer NI liability is £15,000, the £10,500 allowance reduces your bill to £4,500.

Who can claim Employment Allowance?

Basic eligibility

You can claim if:

• You're a business or charity employing staff and paying employer's Class 1 National Insurance.
• Your employer NI bill in the previous tax year was below £100,000. This threshold was introduced in April 2024 to target the relief at smaller employers. If your 2025-26 employer NI bill was £99,999, you qualify for 2026-27. If it was £100,001, you don't.
• You have at least one employee earning above the Secondary Threshold (£9,100 per year in 2026-27, or roughly £175 per week). If all your staff earn below this, you won't owe employer NI anyway, so the allowance is irrelevant.

Who is excluded?

Several categories of employer cannot claim:

Single-director companies with no other employees. If you run a limited company and you're the only director on the payroll—even if you pay yourself a salary—you cannot claim Employment Allowance. HMRC's view is that you're effectively self-employed for this purpose. The moment you employ someone else (a part-time admin assistant, a contractor on PAYE, another director who isn't a family member in certain cases), you become eligible.

Public sector employers, unless you're a charity. This includes local authorities, NHS trusts, government departments. Charities are explicitly allowed to claim even if they receive public funding.

Employers of domestic or personal workers in a private household. If you employ a nanny, housekeeper, or gardener in your home (not as part of a business), you're excluded. However, if you run a care business and employ carers, you're fine.

Employers whose sole employee is a family member doing domestic work. This is a niche exclusion but worth noting.

The £100,000 threshold: how it works

The £100,000 cap applies to your employer NI liability in the previous tax year, not your payroll or turnover.

Example: Green Ltd paid £95,000 in employer NI during 2025-26. In 2026-27, they can claim the full £10,500 allowance, even if their 2026-27 NI bill ends up being £120,000. The test is backward-looking.

If you're a brand-new employer with no previous year, you're automatically eligible (your prior-year NI bill is zero). This helps start-ups.

How much can you actually save?

The real-world impact depends on your payroll size. Let's look at some scenarios.

Small employer: two part-time staff

Example: Sarah runs a bookkeeping practice. She employs two part-time assistants, each earning £18,000 per year (£36,000 total payroll).

Employer NI calculation:

• Each employee earns £18,000, which is £8,900 above the Secondary Threshold of £9,100.
• Employer NI per employee: £8,900 × 13.8% = £1,228.20
• Total for two employees: £2,456.40

With Employment Allowance of £10,500, Sarah's £2,456.40 bill is reduced to zero. She saves the full amount.

Medium employer: five full-time staff

Example: TechStart Ltd employs five developers, each on £35,000 (£175,000 total payroll).

Employer NI calculation:

• Each employee earns £35,000, which is £25,900 above the Secondary Threshold.
• Employer NI per employee: £25,900 × 13.8% = £3,574.20
• Total for five employees: £17,871

With Employment Allowance, TechStart's bill drops from £17,871 to £7,371 (a saving of £10,500). That's nearly 60% off their NI bill.

Larger SME: approaching the threshold

Example: BuildCo Ltd has 15 employees with a total payroll of £450,000. Their employer NI bill for 2025-26 was £98,000.

In 2026-27, their NI bill is projected at £102,000. Because their previous year bill was under £100,000, they still qualify and save £10,500, bringing their 2026-27 bill to £91,500.

However, in 2027-28, they'll be ineligible (because 2026-27 exceeded £100,000), unless their bill drops back below the threshold.

How to claim Employment Allowance

Claiming is straightforward if you run payroll software.

Step 1: Check your eligibility

Before you claim, confirm:

• You have employees (not just yourself as a sole director).
• Your previous year's employer NI was under £100,000.
• You're not a public sector employer (unless a charity).

Step 2: Claim via your payroll software

When you process your first payroll of the tax year (usually early April), your software will ask if you want to claim Employment Allowance. You tick a box or answer "Yes" to the prompt.

Your software then sends an Employer Payment Summary (EPS) to HMRC with the claim embedded. HMRC processes this automatically—there's no separate form or application.

Popular payroll software (Xero, QuickBooks, Sage, BrightPay, etc.) all support this. If you use a payroll bureau or accountant, tell them you want to claim and they'll handle it.

Step 3: The allowance is applied automatically

Once claimed, your payroll software deducts the allowance from your employer NI liability each month (or week, if you pay weekly).

If your monthly employer NI is £1,200, the software will apply £875 of the allowance (£10,500 ÷ 12) and you'll pay £325 that month. This continues until the £10,500 is used up or the tax year ends.

If you don't use up the full allowance (because your total NI bill is less than £10,500), the unused portion simply expires—you can't carry it forward.

Step 4: Claim again next year

Employment Allowance does not auto-renew. You must claim it afresh each tax year. Your software will prompt you again in April 2027, and you tick the box again.

Backdating: claiming for previous years

If you were eligible in past years but didn't claim, you can backdate your claim for up to four tax years.

Example: You've employed two staff since 2022 but never knew about Employment Allowance. In 2026, you can claim for:

• 2025-26
• 2024-25
• 2023-24
• 2022-23

You'll need to submit an EPS for each year via your payroll software (or ask your accountant to do this). HMRC will refund the overpaid NI, though processing can take several weeks.

The amounts you can reclaim:

• 2022-23: up to £5,000
• 2023-24: up to £5,000
• 2024-25: up to £5,000
• 2025-26: up to £5,000

(The allowance was £5,000 until April 2024, when it rose to £5,000 for 2024-25, then £10,500 from April 2026.)

Backdating is particularly valuable for businesses that started employing staff mid-year or simply overlooked the relief.

Common mistakes

Mistake 1: Single-director companies claiming when ineligible

This is the most frequent error. If you're a one-person limited company paying yourself a salary, you cannot claim Employment Allowance, even though you're on the payroll. HMRC treats you as self-employed for this purpose.

The fix: employ someone else—even part-time—and you become eligible.

Mistake 2: Forgetting to claim each year

Because the claim doesn't auto-renew, many employers claim in year one, then forget in year two. Your payroll software should prompt you, but if you switch software or accountants, the reminder might be missed.

Set a calendar reminder each April: "Claim Employment Allowance."

Mistake 3: Assuming the £100,000 threshold is about turnover

The £100,000 limit applies to your employer NI bill, not your revenue or total payroll. A business with £2 million turnover might still qualify if its wage bill (and thus NI bill) is modest.

Mistake 4: Not backdating when eligible

Many businesses discover Employment Allowance years after they became eligible. Don't leave money on the table—backdate your claim if you can.

Mistake 5: Claiming when you employ only domestic staff

If you employ a nanny or cleaner in your home (not as part of a business), you're excluded. Some employers mistakenly claim because they run payroll for domestic staff.

What if your NI bill exceeds £100,000 mid-year?

The eligibility test is based on the previous tax year, not the current one. So if your 2025-26 NI bill was £95,000 but your 2026-27 bill jumps to £110,000 (perhaps you hired more staff), you still get the full £10,500 allowance for 2026-27.

However, in 2027-28, you'll be ineligible because your 2026-27 bill exceeded £100,000.

If your NI bill hovers around £100,000, you might find yourself eligible in alternate years, depending on fluctuations.

Employment Allowance and the Employment Allowance Indicator

When you claim, HMRC records an "Employment Allowance Indicator" against your PAYE scheme. This is simply a flag showing you've claimed. It doesn't affect anything else, but if you're ever investigated or queried, HMRC will check this indicator to confirm your claim was legitimate.

If you claim in error (e.g., you're a single-director company), HMRC may write to you asking for repayment. It's better to check eligibility upfront than to repay later with potential interest.

Interaction with other NI reliefs

Employment Allowance can be used alongside other NI reliefs, such as:

• Freeport NI relief (for employers in designated Freeport areas).
• Veterans' NI relief (for employers hiring veterans in their first year of civilian employment).

However, you cannot "double-dip"—if another relief already reduces your NI bill to zero, the Employment Allowance has no further benefit.

Charities and Employment Allowance

Charities are explicitly eligible, even if they receive public funding or deliver public services. The £100,000 threshold applies in the same way.

Many charities employ dozens of staff and have significant NI bills, so the £10,500 saving is material. Charity trustees should ensure their payroll team or accountant claims the allowance every year.

What to do next

If you employ staff and haven't claimed Employment Allowance, check your eligibility now:

1. Review your 2025-26 employer NI bill. If it was under £100,000 and you have employees (not just yourself), you qualify for 2026-27.
2. Claim via your payroll software in April 2026 (or as soon as you process your first payroll of the new tax year).
3. Backdate if you missed previous years. Submit an EPS for each eligible year and reclaim overpaid NI.
4. Set a reminder to claim again in April 2027. The allowance doesn't auto-renew.

If you're unsure whether you qualify—perhaps you're a director with a spouse on the payroll, or you employ family members—ask AI Tax for a quick eligibility check tailored to your situation. For full payroll setup, backdating claims, or handling HMRC queries, AI Accountant can manage the entire process end-to-end, ensuring you claim every penny you're entitled to and stay compliant.

The £10,500 Employment Allowance is one of the most valuable reliefs for small and medium employers, yet thousands of eligible businesses still don't claim it. Don't be one of them—claim yours and keep more cash in your business where it belongs.