In the previous year, we shared one of our most-read blogs on how employment allowance can help reduce National Insurance costs for small businesses. With new updates now in place for the 2025/26 tax year, it’s time for a fresh look at how limited companies and employers can make the most of this valuable government support. As leading Exeter accountants, we work closely with small businesses, limited companies, and sole traders to ensure they’re not missing out on tax-saving opportunities.
Employment Allowance is a government initiative that allows eligible employers to reduce their Class 1 secondary National Insurance liability by up to £10,500. This has increased from £5,000 last year.
It is designed to support smaller businesses, allowing them to pay less employer’s Class 1 National Insurance each time they run a payroll until the full £10,500 allowance is used or the tax year ends – whichever comes first.
The £10,500 Employment Allowance is per business, not per employee, and can only be claimed against one payroll if your business has multiple payrolls. When an employer’s Class 1 National Insurance liability exceeds the £10,500 allowance limit, any excess must be paid by the business to HMRC.
National Insurance (NI) is the amount of money owed to HMRC depending on how much each employee earns, and it is made up of two payments: one from the employee and one from the employer.
To be eligible for Employment Allowance, you must meet the following criteria:
Note: HMRC has also removed the limit that used to apply to employers with employer’s Class 1 National Insurance liabilities over £100,000.
It isn’t automatic! You can claim Employment Allowance at any point during the tax year through your payroll software. The submission you make to HMRC is the Employment Payment Summary (EPS), which is part of your standard payroll process.
The claiming process will vary depending on which payroll software you are using. For example, in Xero payroll, it can be found within the payroll settings where you have to tick a box to say you want to claim the allowance. That is in the HMRC section of the settings.
Once you have told your respective software you qualify and want to claim the allowance, HMRC will be informed on the next EPS that is sent to them.
Please note: The allowance is allocated to the tax year as a whole, regardless of when you make the claim.
For example, if you make the claim in month 12, HMRC will backdate it to the beginning of the year. If your employer’s national insurance liability is £100 a month and you were to claim Employment Allowance in month 12, they would apply the claim for the whole tax year. That means they would show a credit of £1,200 on their system for the tax year, not just the £100.
If you didn’t claim Employment Allowance in a previous tax year, it’s not too late! However, you can only backdate your claim as far as four years.
For example, if you wanted to make an Employment Allowance claim for the tax year 2024 to 2025 (the tax year ending on 5 April 2025), you would need to make your claim no later than 5 April 2029.
To make a claim for more than one year, you will need a separate EPS for each year. A lot of software won’t allow this. If you need to make a claim for earlier years, we recommend HMRC’s Basic tools software.
At Sidaways, our team of experienced chartered accountants Exeter understands the complexities of payroll, HMRC submissions, and tax compliance. If you’re unsure whether you’re eligible for Employment Allowance 2025/26 or need help submitting a backdated claim, we’re here to guide you every step of the way.
With our range of tailored accounting services, we can support your business with:
Contact us today to find out how our expert accountants can help you make the most of Employment Allowance and keep your business finances on track.
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Michael Broome
Email: michael@sidaways.co.uk
Tel: 01392 360008
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