£10,500 Employment Allowance 2026/27 | Eligibility, How to Claim & Worked Examples | CoreAcc Accountants

In April 2025, the government simultaneously increased the rate of Employer National Insurance from 13.8% to 15%, reduced the secondary threshold — the salary level above which employer NI becomes payable — from £9,100 to £5,000 per year, and raised the Employment Allowance from £5,000 to £10,500. The net effect of these three changes is that the Employment Allowance now offsets a much larger proportion of the employer NI costs of most small businesses than it did before April 2025.

For a business with a payroll of ten employees all earning around the National Living Wage, the rise in employer NI rate and the lower threshold added approximately £9,000 to the annual employer NI bill. The increase in the Employment Allowance from £5,000 to £10,500 added £5,500 of offsetting relief. The net cost increase for that business was therefore approximately £3,500 rather than £9,000 — a meaningful difference, but only if the business actually claims the allowance it is entitled to.

At CoreAcc Accountants, we manage payroll for businesses across Hertfordshire and North London, and we ensure the Employment Allowance is claimed correctly for every eligible client as a matter of course. This guide explains how the allowance works, who qualifies, how it interacts with other aspects of your payroll, and what to do if you have not been claiming it in prior years.

Disclaimer: This article reflects the rules for the 2026/27 tax year. Employment Allowance legislation is subject to change. Always seek specific advice for your individual circumstances.

1. What the Employment Allowance Is and How It Works

The Employment Allowance is a reduction in the employer's Class 1 National Insurance liability. It is not a grant, a repayment, or a tax credit — it is a direct offset against the amount of employer NI that would otherwise be due to HMRC.

For 2026/27, the Employment Allowance is £10,500. This means that eligible employers pay no employer NI until their cumulative employer NI liability for the year reaches £10,500. Once that threshold is passed, employer NI becomes payable on the excess in the normal way.

The allowance is consumed progressively across the tax year. Each time you run your payroll and employer NI becomes due, the outstanding Employment Allowance balance reduces by the amount of employer NI that would otherwise be payable. This continues until either the allowance is fully used up or the tax year ends — whichever comes first.

The allowance applies to employer's Class 1 NI only. It does not reduce employee NI, Income Tax deductions, Class 1A NI on benefits in kind, or any other deduction from the payroll.

How it works in practice

An employer with a monthly employer NI liability of £1,500 consumes their £10,500 Employment Allowance over the first seven months of the tax year. From month one in April through month seven in October, no employer NI is paid to HMRC. From November onwards, the full monthly £1,500 is payable. The total employer NI paid to HMRC for the year is £7,500 (five months at £1,500) rather than £18,000 (twelve months at £1,500) — a saving of £10,500.

The allowance does not accumulate or carry forward. Any unused portion at 5 April is simply lost. A business whose employer NI liability for the full year is only £6,000 — well below the £10,500 allowance — pays no employer NI for the year, but does not receive a cash repayment of the unused £4,500.

2. Who Is Eligible — and Who Is Not

The eligibility rules for the Employment Allowance are clear in principle but contain several specific exclusions that catch businesses out. Understanding them correctly is important because claiming the allowance incorrectly is treated as an underpayment of employer NI, with potential interest and penalties.

The basic eligibility condition

To claim the Employment Allowance in 2026/27, your employer's Class 1 NI liability for the previous tax year — 2025/26 — must have been less than £100,000. If your employer NI bill exceeded £100,000 in 2025/26, you cannot claim the allowance in 2026/27 regardless of your size or structure.

This threshold is assessed at the connected companies level, not the individual employer level — see below.

Who cannot claim

The following categories of employer are specifically excluded from the Employment Allowance.

Companies where the sole employee is also the sole director. A limited company run by a single director with no other employees — or with other employees but where only the director is paid above the NI secondary threshold of £5,000 per year — cannot claim the Employment Allowance. This is the exclusion that affects the largest number of owner-managed businesses. The moment a second person is added to the payroll and their earnings exceed £5,000 per year, the exclusion ceases to apply and the full £10,500 allowance becomes available.

Public bodies and organisations wholly or mainly funded by public authority grants. Local councils, NHS bodies, and similar organisations funded from public revenue are excluded. Most private businesses and charities are unaffected by this exclusion.

Employers whose work is of a domestic or personal nature. A business owner who employs a housekeeper, gardener, or personal care worker for domestic purposes cannot claim the Employment Allowance on that person's wages. Employment in a genuine business context qualifies; domestic employment does not.

Connected companies: one allowance only

Where two or more companies are connected — broadly, where one company controls another, or where both are controlled by the same person or persons — only one Employment Allowance of £10,500 is available across all the connected companies combined. The allowance cannot be doubled or split to benefit each company individually.

Directors and shareholders who operate multiple limited companies under their control must choose which company claims the Employment Allowance in any given tax year. It can only be claimed by one of the connected entities, and the choice should be made at the start of the tax year.

3. The Sole Director Exclusion — the Most Commonly Misunderstood Rule

The sole director exclusion generates more questions at CoreAcc Accountants than any other aspect of the Employment Allowance, so it is worth explaining it carefully.

The exclusion applies where the only payments of earnings above the secondary threshold of £5,000 per year are made to a person who is a director of the company. If the company has other employees but all of them earn below £5,000 per year — perhaps because they work very few hours or are paid below the NI threshold — the exclusion still applies, because the director remains the only person with earnings above the threshold.

The exclusion does not apply once a second employee earns above £5,000 per year. If a sole director company hires a part-time administrator on a salary of £16,000 per year — well above the £5,000 threshold — the exclusion is lifted and the full £10,500 Employment Allowance becomes claimable. This can be a material financial benefit that tips the hiring decision in favour of taking someone on.

A company with two directors — for example, a husband-and-wife business — is not automatically excluded. The exclusion specifically targets companies where the sole employee is the sole director. Two directors both paid above the threshold means the exclusion does not apply and the Employment Allowance can be claimed.

Worked Example 1: When the Sole Director Exclusion Lifts

James runs a digital marketing consultancy through a limited company. He is the sole director and sole employee. His annual salary is £12,570. His employer NI on salary above £5,000 is approximately £1,136 per year. He cannot claim the Employment Allowance — the exclusion applies — so he pays the full £1,136.

In March 2026, James hires a content writer on a salary of £24,000 per year. The writer's employer NI for 2026/27 (from their start date in March — one month into the tax year, so April 2026 onwards) is 15% on earnings above £5,000: 15% × £19,000 = £2,850 per year.

From April 2026, James's company has two employees above the secondary threshold. The sole director exclusion no longer applies. The company can now claim the full £10,500 Employment Allowance.

James's total employer NI for 2026/27 is approximately £3,986 (his own £1,136 plus the writer's £2,850). The Employment Allowance covers the entire liability — the company pays no employer NI at all in 2026/27. The net employer NI saving compared to not having claimed is £3,986. And the remaining £6,514 of unused allowance will roll into the next month's calculations, protecting the company from employer NI as its payroll grows.

4. The £100,000 Threshold — and What Happens at the Boundary

The £100,000 employer NI threshold is assessed on the basis of the employer's Class 1 NI liability in the previous tax year — 2025/26 for eligibility in 2026/27.

For the vast majority of small businesses, this threshold is comfortably below £100,000. An employer would need a payroll of approximately 35 full-time employees on median wages before approaching this level. The threshold effectively restricts the allowance to genuinely small and medium-sized employers rather than large businesses.

Where a business is close to the threshold — say, with an employer NI liability of £85,000 to £95,000 — it is worth monitoring carefully, because crossing £100,000 in any given year would remove eligibility in the following year. Salary sacrifice arrangements, which reduce gross pay and therefore reduce employer NI costs, can in some cases help manage the liability below the threshold. This is discussed further below.

5. How to Claim the Employment Allowance

The Employment Allowance is not claimed automatically — it must be actively claimed through your payroll software. The claim is made on the first Employer Payment Summary (EPS) submission of the tax year, or as soon as you become aware of eligibility if that is during the year.

On the EPS, you select "Yes" to the question about whether you are claiming the Employment Allowance for the year. Once this is done, HMRC records the claim and your payroll software reduces the employer NI amount due in each subsequent period by the remaining allowance balance until either the allowance is exhausted or the year ends.

If you are using a managed payroll service such as that provided by CoreAcc Accountants, your payroll provider should be making this claim on your behalf as a standard part of the year-start payroll setup. If you run payroll in-house, check that the claim has been made on your first EPS of 2026/27.

If you discover mid-year that the claim was not made at the start of the year, it can be made at any point during the tax year. The allowance is applied from the point the claim is made — you cannot retrospectively apply it to periods before the claim was submitted in the current year, but you can make the claim now and benefit from the remaining balance for the rest of 2026/27.

6. Retrospective Claims: Up to Four Prior Tax Years

One of the most valuable — and most overlooked — aspects of the Employment Allowance is that businesses which were eligible in prior years but did not claim can make a retrospective claim for up to four previous tax years.

For a claim made in 2026/27, the four prior years available are 2025/26, 2024/25, 2023/24, and 2022/23. The allowance amounts for prior years are different from the current year — in 2024/25 the allowance was £5,000, in 2023/24 it was £5,000, and in 2022/23 it was £5,000. A business that was eligible but did not claim in each of those years could potentially recover up to £15,000 in prior year Employment Allowance by making retrospective claims, in addition to the £10,500 for 2026/27.

Retrospective claims are made through your payroll software by submitting an amended EPS for the relevant earlier year. Where a retrospective Employment Allowance claim results in an overpayment of employer NI for that earlier year, HMRC issues a repayment or applies the credit against outstanding liabilities — they do not simply wait for you to remember to claim.

Worked Example 2: The Retrospective Claim

Sunridge Catering Ltd employed eight members of staff throughout 2022/23, 2023/24, and 2024/25 but was not aware it was eligible for the Employment Allowance in any of those years. The company's employer NI liability in each of those years was well below £100,000, and no director was the sole employee.

Annual employer NI liabilities were approximately £18,000 per year. The Employment Allowance in each of those years was £5,000. In each year, had the allowance been claimed, Sunridge would have paid £13,000 in employer NI rather than £18,000 — a saving of £5,000 per year.

In February 2026, CoreAcc Accountants reviews Sunridge's payroll history and identifies the missed claims. Retrospective EPS submissions are made for 2022/23, 2023/24, and 2024/25. HMRC processes the claims and issues a combined repayment of £15,000 — three years of unclaimed allowance at £5,000 per year.

Sunridge's Employment Allowance for 2026/27 is then claimed at the new rate of £10,500 from the start of the tax year. The combined benefit of the retrospective claims and the current year claim is £25,500 — money the business had paid to HMRC unnecessarily and is now recovering.

7. The Employment Allowance and Salary Sacrifice

Salary sacrifice arrangements — where an employee agrees to reduce their gross pay in exchange for a non-cash benefit such as a pension contribution or an electric vehicle — reduce the gross pay on which employer NI is calculated. This has two relevant interactions with the Employment Allowance.

First, salary sacrifice reduces the employer NI liability, which means the Employment Allowance is consumed more slowly and may not be fully used by the year end. Where a small business has a lower employer NI liability as a result of salary sacrifice, the interaction means the allowance stretches further and the business is more likely to be fully shielded from employer NI throughout the year.

Second, for businesses approaching the £100,000 employer NI threshold — where exceeding it would remove eligibility for the Employment Allowance in the following year — salary sacrifice can be a mechanism to manage the liability below the threshold. However, this only works where the salary sacrifice arrangements are genuine and commercially reasonable, and where employees voluntarily participate.

The NMW interaction must also be checked when salary sacrifice and the Employment Allowance are considered together. Post-sacrifice cash pay must not fall below the National Minimum or Living Wage for the hours worked, regardless of how valuable the Employment Allowance saving might be. We discussed this in our April 2026 payroll changes article.

8. The Employment Allowance and Hiring Decisions

One of the most practical uses of Employment Allowance planning is in modelling the true cost of hiring. Because the Employment Allowance offsets employer NI, the cost of hiring additional employees is lower for eligible businesses than the headline employer NI rate suggests — at least until the allowance is exhausted.

For a sole director company that cannot currently claim the Employment Allowance, the decision to make a first hire has an additional dimension: it lifts the sole director exclusion and makes the full £10,500 Employment Allowance available. The employer NI saving available immediately on hiring a first employee partially offsets the cost of that hire.

Worked Example 3: The True Cost of a First Hire

Rachel runs a brand consultancy as a sole director. She is considering hiring a junior designer on a salary of £28,000 per year. She wants to understand the true employer cost.

Without the Employment Allowance (which she currently cannot claim as a sole director company):

The designer's employer NI is 15% on earnings above £5,000 = 15% × £23,000 = £3,450 per year. Total employer cost of the hire in year one: £28,000 salary + £3,450 employer NI = £31,450.

With the Employment Allowance (which she can now claim because she has a second employee above the threshold):

The Employment Allowance covers up to £10,500 of employer NI. Her total employer NI for 2026/27 is her own director salary NI (£1,136) plus the designer's NI (£3,450) = £4,586. The Employment Allowance covers the entire £4,586 — she pays no employer NI for the year.

The true employer cost of the hire in year one, net of the Employment Allowance saving: £28,000 salary + £0 employer NI = £28,000. The Employment Allowance has saved £3,450 on the designer's NI and an additional £1,136 on Rachel's own NI — a combined saving of £4,586 that directly reduces the cost of the hiring decision.

Rachel's cost model for the hire should reflect this. The employment decision is financially more attractive than it first appeared, because the allowance previously unavailable to her sole director company is now unlocked by making this hire.

9. The Employment Allowance and Auto-Enrolment

Where a business operates auto-enrolment pension contributions for its employees, the Employment Allowance interacts indirectly through salary sacrifice pension arrangements, as noted above. But there is a more direct interaction to be aware of.

Employer pension contributions made through a salary sacrifice arrangement reduce the gross pay on which employer NI is calculated. For a business that is close to fully using its Employment Allowance, ensuring that salary sacrifice pension contributions are structured correctly can mean the difference between using the full £10,500 and leaving part of it unused. CoreAcc Accountants models this for clients with significant payrolls to ensure the two reliefs work together as effectively as possible.

Frequently Asked Questions

What is the Employment Allowance and how much is it in 2026/27?

The Employment Allowance is a relief that allows eligible employers to reduce their employer's Class 1 National Insurance liability. For 2026/27 it is £10,500, increased from £5,000 in 2024/25 as part of the same package of changes that raised the employer NI rate to 15% and reduced the secondary threshold to £5,000 per year. The allowance offsets employer NI progressively through the year — you pay less employer NI each pay period until the allowance is used up or the tax year ends.

Can my limited company claim the Employment Allowance if I am the only director and employee?

No. A limited company where the only employee — or the only employee earning above the NI secondary threshold of £5,000 per year — is also the sole director cannot claim the Employment Allowance. This is a specific statutory exclusion. The moment a second person joins the payroll and their earnings exceed £5,000 per year, the exclusion is lifted and the full £10,500 allowance becomes available. Many sole director company owners are unaware of this rule and either claim incorrectly or miss the allowance when they start to grow their team.

Can I still claim if my employer NI liability was more than £100,000 last year?

No. Eligibility for the Employment Allowance in 2026/27 requires that your employer's Class 1 NI liability in the previous tax year — 2025/26 — was less than £100,000. If it exceeded that figure, you cannot claim the allowance in 2026/27 regardless of your size or structure. This threshold is applied at the level of connected companies — if you control multiple companies, the combined employer NI across all connected entities is measured against the £100,000 limit.

How do I actually claim the Employment Allowance?

You claim through your payroll software by selecting "Yes" to the Employment Allowance question on your first Employer Payment Summary (EPS) submission of the tax year. Once submitted, HMRC records the claim and your payroll software automatically reduces the employer NI due in each subsequent period until the allowance is exhausted. If you use a managed payroll service, your provider should be making this claim on your behalf. If you run payroll in-house, check your first EPS of 2026/27 to confirm the claim has been made.

What if I forgot to claim the Employment Allowance in previous years?

You can make retrospective claims for up to four prior tax years. For a claim made during 2026/27, the available prior years are 2025/26, 2024/25, 2023/24, and 2022/23. The Employment Allowance in each of those years was £5,000. If you were eligible in all three earlier years and did not claim, you could recover up to £15,000 in repayments or credits against outstanding liabilities. Retrospective claims are made through amended EPS submissions in your payroll software. CoreAcc Accountants can identify whether retrospective claims are available and manage the submission process on your behalf.

Can two connected companies both claim the Employment Allowance?

No. Where two or more companies are connected — broadly, controlled by the same person or persons — only one Employment Allowance of £10,500 is available across the entire connected group. You choose which company makes the claim, but you cannot claim separately in each connected entity. The choice should be made at the start of the tax year and applied consistently.

Does the Employment Allowance cover employer NI on benefits in kind?

No. The Employment Allowance offsets employer's Class 1 NI only — the NI deducted through the payroll on employees' cash earnings. Class 1A NI, which is payable on benefits in kind such as company cars, private health insurance, and other non-cash benefits, is calculated separately and reported on the P11D(b) form submitted each July. The Employment Allowance does not offset Class 1A NI.

If I do not use all of the Employment Allowance this year, can I carry it forward?

No. Any unused Employment Allowance at the end of the tax year on 5 April is lost. The allowance cannot be carried forward to the following year. This means that businesses whose employer NI liability for the full year is lower than £10,500 will not use the full allowance — they will simply pay no employer NI for the year, with no cash refund of the unused portion. There is no disadvantage to this — you simply benefit from a full year of no employer NI — but it is worth understanding that the unused balance has no future value.

How does the Employment Allowance interact with salary sacrifice?

Salary sacrifice arrangements reduce gross pay, which in turn reduces the employer NI on which the Employment Allowance is calculated. For businesses with salary sacrifice pension or electric vehicle schemes, employer NI is lower than it would be without the sacrifice — which means the Employment Allowance lasts longer through the year. For businesses approaching the £100,000 prior-year threshold, salary sacrifice can reduce employer NI below the threshold and preserve eligibility for the allowance in the following year. However, salary sacrifice must always respect the National Minimum Wage — post-sacrifice cash pay cannot fall below the applicable NMW or NLW rate for the hours worked.

Does hiring my first employee make the Employment Allowance available to my company?

Potentially yes, if your company is currently excluded as a sole director company. The sole director exclusion applies where the only employee earning above the NI secondary threshold (£5,000 per year) is the director. Once a second employee is paid above that threshold, the exclusion is lifted and the full £10,500 allowance becomes available immediately. This means the Employment Allowance is one of the financial factors worth including in any business case for making a first hire — the saving on employer NI reduces the net cost of the additional employee from the point of hiring.

How does my payroll provider claim the allowance?

Your payroll provider — such as CoreAcc Accountants — makes the Employment Allowance claim by selecting the relevant indicator on your Employer Payment Summary when setting up your payroll at the start of each tax year. The payroll software then automatically tracks the remaining allowance balance and reduces the employer NI payment due to HMRC each period accordingly. A well-run managed payroll service should be making this claim as a standard part of year-start setup, without you needing to ask. If you are not certain whether your allowance has been claimed for 2026/27, contact your payroll provider to confirm.

What CoreAcc Accountants Can Help You With

The Employment Allowance is one of the most straightforward payroll reliefs available — but only if it is correctly claimed, on time, by eligible businesses. At CoreAcc Accountants, we ensure the following as a matter of standard service for every payroll client.

We claim the Employment Allowance on your behalf from the first payroll run of each tax year, so you are never waiting for the relief to be applied. We assess eligibility at the start of each year, including reviewing any changes in your business structure — such as the addition of a new director or employee — that might affect the sole director exclusion or the connected companies position. We review your prior year claims and identify any retrospective claims available, recovering money paid to HMRC unnecessarily in prior years. And we model the Employment Allowance alongside your salary sacrifice arrangements, pension contributions, and hiring plans to ensure the relief works as effectively as possible alongside everything else we manage for you.

Beyond the Employment Allowance, our fully managed payroll service covers monthly RTI submissions, auto-enrolment pension administration, P11D and benefit in kind reporting, and compliance with the April 2026 payroll changes including Day-One SSP, the new NMW rates, and the rules around payrolling of benefits.

Get in Touch

Whether you want to confirm your eligibility for 2026/27, investigate retrospective claims for prior years, or move to a fully managed payroll service that handles all of this automatically, CoreAcc Accountants is ready to help.

CoreAcc Accountants is an ACCA-accredited firm of Chartered Certified Accountants based in Borehamwood, Hertfordshire. This article was published in February 2026 and reflects Employment Allowance rules in force for the 2026/27 tax year. It does not constitute professional advice. Always seek specific advice for your individual circumstances.

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