Claiming the Employment Allowance can save your business up to £10,500 a year in National Insurance contributions. Therefore, this is a particularly valuable relief given the increase in the NI rate from 6 April 2025. However, not every business qualifies. Therefore, understanding the rules is crucial to avoid disappointment or unnecessary penalties.
Who Can’t Claim the Employment Allowance?
Some businesses are automatically excluded from claiming the Employment Allowance. Some examples of these include:
What about single director companies?
A company cannot usually qualify for the Employment Allowance for a tax year if all earnings paid above the NI threshold are to a director.
Furthermore, where a company has several employees, if the director is the only one paid above the secondary threshold, the company cannot claim the allowance.
However, if circumstances change during the year so the director either becomes or stops being the only employee paid over the NI threshold, the allowance can be claimed for the whole year.
But, the allowance is not reduced where there is a second employee for only part of the year. As a result, a company could employ an additional employee for a short period, or on a small salary. In fact, if they are paid over the NICs threshold in a single week the full allowance would be due.
However, we think it unlikely that HMRC would condone claiming the Employment Allowance in such circumstances. Nevertheless, we have set out examples below to demonstrate how this could be claimed in practice.
Example 1
Jean Luc is the director of his company Enterprise Ltd and is the only paid employee. In June 2025, he takes on an employee, paying them above the NI employee threshold. As a result, Enterprise Ltd is eligible to claim the full Employment allowance.
Example 2
Agnes is the director of her company Borg Ltd and is paid above the NI employee threshold.
She has four employees but none of them earn above the NI employee threshold.
Consequently, Borg Ltd will not be eligible to claim the Employment allowance.
Example 3
Tony and Ziva are directors of Dinozzo Ltd. There are no employees.
Tony receives an annual salary that is above the directors’ NI threshold but Ziva takes an annual salary of only £5,000.
On 1 February 2025, a third director, Abi, is appointed who takes a salary of £5,000 for the period up to 5 April 2025. Abi's salary is above the annual employee NI threshold for 2025 when time is apportioned from the date of her appointment. Accordingly, Dinozzo Ltd is eligible to claim the full Employment allowance for 2025
Example 4
John is the director of his company Halloran Ltd. Additionally, the company has a single full-time employee who is paid above the NI employee threshold. However the employee leaves in November 2023 and is replaced by a part-time employee earning below the NI employee threshold. Halloran Ltd is eligible to claim the full Employment allowance for the remainder of the 2024/25 tax year.
Connected businesses - sole traders and partnerships
Where a sole trader or partnership runs two businesses with separate payrolls, HMRC treat the two as one for the purposes of claiming the Employers Allowance.
Unlike companies (see below) there are no connection tests as such. Therefore, a husband who operates a garage, and a wife who runs a pharmacy, each with separate payrolls and employees, will not be connected. As a result, each may claim the Employers Allowance.
Alternatively, if you run a company and a sole trade (or partnership) the two businesses are not connected. Although, only if they have separate payrolls and different employees.
Where two sole traders or partnerships merge then the newly merged business may only claim one Employers Allowance going forward. Although only if there is any balance to claim
Connected businesses - companies
The connection tests for companies claiming the Employment Allowance are aligned with the Associated companies rules. However there are some modifications for LLPs, trustees, and preference shares.
Connected companies with employees can't both claim the Employment Allowance. This means that one company must make a claim by agreement with it's connected companies.
A company may be connected to a Limited Liability Partnership (LLP) or a charity, for the purposes of claiming the Employment Allowance. However it cannot be connected to a sole trader or partnership.
Additionally, an LLP is treated as a company and is not treated transparently in the Employers Allowance connection test.
Summary
Claiming the Employment Allowance offers real savings for small and medium businesses. Although, you must be aware of the rules. However where you run connected companies, a single director company or are within the scope of IR35, you may be excluded.
You should plan carefully, act early, and review your setup each year. This way, claiming the Employment Allowance is a valuable saving, not a missed opportunity.
For more useful information, check out our Ebooks here
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here.