Employment Allowance: What Does It Mean for Limited Company Owners?
Employment Allowance can be very useful for limited companies with employees.
It allows an eligible company to reduce its employer National Insurance bill.
For 2026/27, the Employment Allowance is £10,500.
This means an eligible company can reduce its employer Class 1 National Insurance by up to £10,500 in the tax year.
For some limited company owners, this can make a significant difference to payroll costs and director salary planning.
However, the rules are not always straightforward, especially for small owner-managed companies.
What is Employment Allowance?
Employment Allowance is a relief against employer National Insurance.
It does not reduce:
employee National Insurance;
PAYE Income Tax;
Class 1A National Insurance on benefits;
Class 1B National Insurance on PAYE Settlement Agreements;
Corporation Tax.
It only reduces the employer’s Class 1 National Insurance liability.
This is the National Insurance paid by the company as the employer.
For 2026/27, employer National Insurance is charged at 15% on earnings above the Secondary Threshold.
The Secondary Threshold for 2026/27 is £5,000 per year.
So, once an employee or director earns above this level, employer National Insurance may become payable, unless a special relief or allowance applies.
Why does this matter for company owners?
Many small limited company owners pay themselves a salary.
A salary can be useful because it can:
reward the director for work done;
reduce the company’s taxable profit;
help protect the director’s National Insurance record;
support pension planning;
form part of a tax-efficient profit extraction strategy.
However, salary can create employer National Insurance for the company.
Employment Allowance can reduce or remove that employer National Insurance where the company is eligible.
This means a higher salary may sometimes be worth considering.
But this is not always the case.
The best salary level depends on the company’s profits, other employees, Employment Allowance eligibility,
Corporation Tax rate, the director’s personal tax position and how much income the director needs.
The key 2026/27 National Insurance thresholds
For 2026/27, the main annual Class 1 National Insurance thresholds are:
Lower Earnings Limit: £6,708
Primary Threshold: £12,570
Secondary Threshold: £5,000
The Lower Earnings Limit is relevant for National Insurance entitlement.
The Primary Threshold is the point where employee National Insurance usually starts.
The Secondary Threshold is the point where employer National Insurance usually starts.
This is why employer National Insurance can arise even where no employee National Insurance is due.
For example, a director salary of £12,570 is below the employee National Insurance Primary Threshold, but it is above the employer Secondary Threshold.
If Employment Allowance is not available, the company may still have employer National Insurance to pay.
Example: salary of £12,570 with no Employment Allowance
Assume a director is paid a salary of £12,570 in 2026/27.
The employer Secondary Threshold is £5,000.
Employer National Insurance is charged at 15% on the amount above £5,000.
The calculation is:
£12,570 - £5,000 = £7,570
£7,570 × 15% = £1,135.50
So, if Employment Allowance is not available, the company would pay employer National Insurance of £1,135.50 on a director salary of £12,570.
The salary and employer National Insurance should normally reduce the company’s taxable profits, but the company still needs to fund the employer National Insurance cost.
Can all limited companies claim Employment Allowance?
No.
This is where many company owners get caught out.
A limited company cannot automatically claim Employment Allowance just because it runs payroll.
The company must be eligible.
For many small companies, the most important rule is this:
A single-director company cannot claim Employment Allowance if the director is the only employee liable for employer Class 1 National Insurance.
In simple terms, if your company has one director and no other employees paid above the Secondary Threshold, the company will usually not qualify for Employment Allowance.
This means many one-person limited companies cannot use Employment Allowance against the director’s salary.
When can a small limited company qualify?
A small limited company may qualify for Employment Allowance where it has another employee or director who is paid above the Secondary Threshold.
For example, the company may qualify where:
there are two directors and both are paid above the Secondary Threshold;
the company has at least one employee paid above the Secondary Threshold;
the company has seasonal workers and at least one is paid above the Secondary Threshold in a week;
the company meets the wider eligibility conditions.
The key point is that the company usually needs more than one person creating, or capable of creating, employer Class 1 National Insurance liability.
The rules should be checked each tax year.
What if the company has employees under 21 or apprentices?
There are special employer National Insurance rules for some employees, such as employees under 21 and apprentices under 25.
For 2026/27, employer National Insurance can be charged at 0% for these categories up to the relevant upper secondary threshold, which is generally aligned with £50,270 per year.
This means these employees may not use much, or any, Employment Allowance if their earnings are below the relevant upper secondary threshold.
However, their employment may still be relevant when considering whether a single-director company meets the additional employee requirement.
This is a more technical area, so the payroll position should be checked carefully.
How much salary can Employment Allowance cover?
For 2026/27, Employment Allowance is £10,500.
Employer National Insurance is generally 15% above the Secondary Threshold of £5,000.
If the full £10,500 Employment Allowance is available and no other employer National Insurance has used it, the allowance could cover employer National Insurance on a director salary of up to £75,000.
The calculation is:
£75,000 - £5,000 = £70,000
£70,000 × 15% = £10,500
This means the employer National Insurance on a £75,000 salary could be covered by the Employment Allowance, where the company is eligible and the full allowance is still available.
However, this does not mean the salary is tax-free.
The director still must pay Income Tax and employee National Insurance personally.
It simply means the company’s employer National Insurance may be covered by the allowance.
What if some of the allowance has already been used?
Many companies will already use part of the Employment Allowance against employer National Insurance on staff wages.
This reduces the amount left to cover the director’s salary.
For example, assume a company has already used £6,750 of its Employment Allowance on employees.
The allowance for 2026/27 is £10,500.
This leaves:
£10,500 - £6,750 = £3,750
The company can use the remaining £3,750 against employer National Insurance on the director’s salary.
To work out the salary covered by the remaining allowance:
£3,750 ÷ 15% = £25,000
Add the Secondary Threshold:
£25,000 + £5,000 = £30,000
So, in this example, the company may be able to pay a director salary of up to £30,000 without an employer National Insurance cost, assuming the company is eligible and the allowance is available.
Should directors increase their salary just because Employment Allowance is available?
Not always.
This is an important point.
Employment Allowance can reduce employer National Insurance, but a higher salary can still create:
more Income Tax for the director;
employee National Insurance;
changes to the dividend calculation;
possible impact on Child Benefit;
possible impact on the personal allowance if income exceeds £100,000;
pension planning considerations;
cash flow issues for the company.
A higher salary can reduce Corporation Tax because salary is normally deductible for the company.
But dividends are taxed differently and are not subject to National Insurance.
So the best answer depends on the full picture.
Employment Allowance may make a higher salary more attractive in some cases, but it does not automatically make it the best option.
Example: full Employment Allowance available
Assume a company qualifies for Employment Allowance.
The company has other employees, but their wages do not use the allowance.
This means the full £10,500 is available.
The director considers taking a salary of £75,000.
Employer National Insurance before Employment Allowance would be:
£75,000 - £5,000 = £70,000
£70,000 × 15% = £10,500
Employment Allowance could cover the full £10,500 employer National Insurance cost.
The company therefore has no employer National Insurance to pay on that salary, assuming the full allowance remains available.
The salary should normally reduce the company’s taxable profits.
However, the director still needs to consider their personal Income Tax and employee National Insurance position.
This type of planning should be calculated properly before changing salary levels.
Example: single director with no employees
Now assume a company has one director and no other employees.
The director wants to pay themselves a salary of £12,570.
The company is a single-director company, and the director is the only employee paid above the Secondary Threshold.
In this case, the company will usually not qualify for Employment Allowance.
Employer National Insurance would be:
£12,570 - £5,000 = £7,570
£7,570 × 15% = £1,135.50
The company may still decide that paying this salary is worthwhile, especially if the salary helps protect the director’s National Insurance record and reduces Corporation Tax.
But the employer National Insurance cost must be considered.
Temporary or seasonal workers
HMRC guidance confirms that a company may become eligible where an additional employee earns above the Secondary Threshold during the tax year, including in some seasonal worker situations.
However, the employment must be genuine.
A company should not create artificial payroll arrangements just to claim Employment Allowance.
If a company employs a temporary worker, it should keep proper records showing:
the work carried out;
the employment period;
the amount paid;
payroll submissions;
PAYE and National Insurance treatment;
and why the role was commercially needed.
The arrangement should make business sense.
Connected companies
Connected companies need to be careful.
Where companies are connected, only one company in the group can claim Employment Allowance.
This is relevant where the same person or people control more than one company.
For example, if a director owns two connected companies, they may not be able to claim Employment Allowance separately in both companies.
The group position should be checked before making a claim.
How to claim Employment Allowance
Employment Allowance is claimed through payroll.
The company normally claims by submitting an Employer Payment Summary through payroll software.
The claim is not automatically carried forward in the same way for every situation, so it should be reviewed each tax year.
The allowance is then used against employer Class 1 National Insurance as the liability arises.
If the company uses up the full allowance during the tax year, it must pay any remaining employer National Insurance to HMRC.
Keep records
HMRC expects employers to keep records relating to their Employment Allowance claim.
The records should show:
why the company was entitled to claim;
how much allowance was used;
what employer National Insurance liabilities were covered;
whether the company was connected with any other company;
whether the single-director company restriction was considered;
and whether the claim was stopped if the company stopped being eligible.
Good records are important because HMRC may ask how the company qualified.
Common mistakes limited company owners should avoid
Limited company owners should avoid:
assuming Employment Allowance is available to every company;
claiming it for a single-director company with no other qualifying employee;
forgetting that it only reduces employer Class 1 National Insurance;
assuming it reduces employee National Insurance or PAYE tax;
ignoring connected company rules;
forgetting to check whether staff wages have already used the allowance;
increasing director salary without checking the personal tax position;
relying on artificial or non-commercial employment arrangements;
failing to submit the claim through payroll;
and failing to keep records of the claim.
Final thoughts
Employment Allowance is more valuable than it used to be because the 2026/27 allowance is £10,500.
For eligible limited companies, it can significantly reduce employer National Insurance.
In some cases, where the full allowance is available, it can cover employer National Insurance on a director salary of up to £75,000.
But this does not mean a £75,000 salary is always the best answer.
The company must be eligible.
The director’s personal tax must be considered.
The company’s profits and cash flow must be reviewed.
And the overall salary and dividend mix should be calculated properly.
The key questions are:
Is the company eligible for Employment Allowance?
Is there another employee or director paid above the Secondary Threshold?
Has any of the allowance already been used?
What employer National Insurance would be due without the allowance?
Does a higher salary improve the overall company and personal tax position?
At Busy Bee, we help limited company owners stay compliant, tax efficient and in control of their business finances.
Disclaimer: The content on this page is for general information only and should not be treated as tax, legal or financial advice. Tax planning should always be reviewed against your individual circumstances before action is taken.
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