Advanced Taxation (UK) · National insurance contributions for employed and self-employed persons

Employment Allowance: Eligibility, Exclusions and Connected Companies

Updated 11 October 2026 · Fact-checked

The employment allowance is an annual relief of £10,500 that reduces an eligible employer's Class 1 secondary (employer) NIC bill. It cannot create a refund. Only one allowance is available for a group of connected companies. Some employers are excluded, such as public sector businesses and single-employee director companies.

Understand Employment Allowance

Employers pay Class 1 secondary NIC at 15% on each employee's earnings above £5,000 a year. For a business with many staff, this is a big cost. The employment allowance gives eligible employers a deduction from that bill each tax year.

The allowance is £10,500 per tax year, per employer or connected group. It works as a reduction of the employer's NIC liability, not as a deduction from profit. If the employer's secondary NIC is below £10,500, the allowance is limited to the NIC actually due. There is no refund and no carry forward of the unused part.

It only reduces employer Class 1 NIC. Employee NIC (8% and 2%) and self-employed Class 4 are not affected. In the exam, always check whether the NIC being reduced is the employer's Class 1 secondary charge.

Some employers cannot claim. These include a company where the only employee paid above the secondary threshold is a director, public bodies and businesses doing more than half their work for the public sector, and people employing staff for domestic purposes (such as a nanny). Read the scenario for who the employees are.

The connected-company rule stops groups splitting a business to claim several allowances. Companies are connected where one controls the other, or the same person controls both. Connected companies share one allowance, which they can allocate between them as they choose.

Key rules to remember

Employment allowance amount: Maximum relief = £10,500 per tax year; Given in the ATX-UK tax tables. Per employer, or per group of connected companies.
Employer Class 1 NIC before allowance: 15% × (earnings above £5,000 per employee per year); Rate and threshold as given in the tax tables. Apply per employee.
NIC payable after allowance: Secondary NIC − lower of (£10,500, secondary NIC due); The result cannot be below nil. Unused allowance is lost.
Connected companies: One allowance of £10,500 shared across the connected group; Connected where one company controls the other or the same person controls both. Allocate sensibly.
Eligibility check: Not eligible if the only employee paid above the secondary threshold is a director, or if a public sector or domestic employer; State the exclusion in plain words and apply it to the facts.

How to solve Employment Allowance questions

Use this order for any employment allowance question. It covers both calculations and eligibility discussion.

1Identify the employer and any other companies it is connected with. Look for common control by the same person or one company controlling another.
2Check the exclusions: single-director company with no other employee paid above the secondary threshold, public sector business, or domestic employment.
3Compute employer Class 1 secondary NIC for each employee: 15% on earnings above £5,000 a year, then add up.
4If companies are connected, add the secondary NIC of each and note that only one £10,500 allowance is available for the group.
5Deduct the allowance, limited to the NIC actually due. Never let the liability go below nil.
6Allocate the allowance between connected companies if required, and state any unused amount is lost.
7Conclude with the NIC payable and one line on the practical advice, such as how many staff or companies affect the result.

Quickest way: Three-line allowance check

When to use it: When time is short and the question asks for the NIC saving or payable from the allowance.

Total the secondary NIC: 15% × (total pay − £5,000 per employee).
Relief = the lower of £10,500 and that total (once for a connected group).
Payable = total − relief. Write one sentence on eligibility.

Common mistakes in Employment Allowance

Giving each connected company its own £10,500.
Students treat each company as a separate taxpayer.
Fix: Check for common control. If connected, one allowance covers the whole group.
Applying the allowance to employee NIC or Class 4.
The word 'allowance' sounds like it reduces any NIC.
Fix: Use it only against the employer's Class 1 secondary NIC.
Letting the allowance create a refund or negative NIC.
Students subtract £10,500 without comparing it to the liability.
Fix: Relief is the lower of £10,500 and the NIC due. Unused relief is lost.
Ignoring the single-director exclusion.
The scenario mentions only 'a company with one employee', and the student claims anyway.
Fix: If the director is the only employee paid above the secondary threshold, the company cannot claim. Check for any other qualifying employee.
Applying 15% to total pay without deducting the £5,000 threshold per employee.
Rushing the secondary NIC computation.
Fix: Deduct £5,000 from each employee's annual earnings, then apply 15%.

Worked examples

Example 1

Trade Ltd employs 10 staff, each paid £40,000 a year. It is not connected to any other company and is not an excluded employer. Calculate its employer Class 1 NIC for the year after the employment allowance.

Show the solution

Secondary NIC per employee = 15% × (£40,000 − £5,000) = 15% × £35,000 = £5,250.
Total for 10 employees = £5,250 × 10 = £52,500.
Employment allowance = lower of £10,500 and £52,500 = £10,500.
NIC payable = £52,500 − £10,500 = £42,000.

Answer: Employer Class 1 NIC payable is £42,000.

Example 2

Ann controls both A Ltd and B Ltd. Before any allowance, A Ltd's employer Class 1 NIC is £7,000 and B Ltd's is £9,000. Explain how the employment allowance applies and state the total NIC payable.

Show the solution

The companies are connected because the same person controls both, so only one £10,500 allowance is available.
Total NIC before allowance = £7,000 + £9,000 = £16,000.
Allowance is the lower of £10,500 and £16,000 = £10,500.
One sensible allocation: A Ltd uses £7,000, so A Ltd pays nil. The remaining £3,500 goes to B Ltd, so B Ltd pays £9,000 − £3,500 = £5,500.
Check: total payable = £16,000 − £10,500 = £5,500.

Answer: The group shares one allowance. Total NIC payable is £5,500, however the allowance is allocated.

Exam tips

Quote the £10,500 and the 15% above £5,000 from the tax tables, and say they are the 2025/26 figures the supplementary instructions tell you to assume continue.
Scan every scenario for common control. Connected-company facts are often hidden in the background details.
Show each step. Marks go for the per-employee computation, the cap on relief and the conclusion.
In planning questions, such as splitting a business or paying a spouse, say the allowance may not be multiplied by using several connected companies.
State the exclusion in words and tie it to the facts. Do not just list exclusions.

Practice questions from National insurance contributions for employed and self-employed persons

Employment Allowance: frequently asked questions

How much is the employment allowance for 2026/27?

In the ATX-UK tax tables for this exam cycle it is £10,500. The supplementary instructions tell you to assume the 2025/26 rates continue unless told otherwise. Use £10,500 unless the question gives another figure.

Who cannot claim the employment allowance?

Employers cannot claim if the only employee paid above the secondary threshold is a director of the company. Public sector bodies, and businesses doing more than half their work for the public sector, are also excluded. Employers of domestic staff, such as a nanny, cannot claim either.

What is the connected companies rule for the employment allowance?

Companies are connected if one controls the other, or the same person controls both. Connected companies get only one £10,500 allowance between them. They choose how to allocate it.

Can I carry forward or get a refund of unused employment allowance?

No. The allowance only reduces employer Class 1 NIC due in that tax year. Any unused part is lost and cannot be refunded or carried forward.