What is Employment Allowance? National Insurance reduction explained

UK employers are awaiting 6 April with dread. Come Spring, the main rate of employer National Insurance Contributions (NICs) is set to rise from 13.8% to 15%.

Meanwhile, the secondary threshold—the point at which employers start paying NICs on employee wages—will also drop from £9,100 to £5,000 annually. SMEs have already begun to scale back their growth plans, with nearly a fifth planning to cut jobs.

It’s far from a gift for organisations, many of which are already feeling financial pressure. But in a very small silver lining for business owners, Employment Allowance is also set to increase, somewhat easing the financial pressure of upcoming tax rises.

What is Employment Allowance?

Employment Allowance is a scheme designed to help eligible employers reduce their annual secondary Class 1 National Insurance contributions. This allowance serves as a deduction from your yearly employer NIC bill.

Currently, the Employment Allowance allows qualifying employers to cut their National Insurance contributions by up to £5,000 each tax year. But also from April 6 2025, this allowance is set to more than double.

As a result, eligible employers will now be able to reduce their Class 1 National Insurance liability by up to £10,500. 

Who can claim Employment Allowance?

In last year’s Autumn Budget, chancellor Rachel Reeves announced the increase in the Employment Allowance, plus the removal of a significant restriction for the scheme.

Until now, businesses could only qualify for the Employment Allowance if they had a secondary Class 1 National Insurance liability of less than £100,000. However, starting from April 6, this cap will be completely lifted.

The change broadens the eligibility criteria for Employment Allowance significantly. From April, most businesses and charities can claim the allowance as long as they:

• Are registered as an employer
• Are a business or charity with documented employees
• Have two (or more) directors who earn over the secondary threshold for Class 1 NICs

To clarify, from April onwards, the amount of a business’s Class 1 National Insurance liabilities in the previous tax year will no longer matter when claiming the allowance.

According to government figures, this means that 865,000 employers will not have to pay any National Insurance contributions in 2025.

Certain exclusions will still apply. Most notably, businesses with a single director or employee (for example, sole traders) still do not qualify for the allowance.

How to claim Employment Allowance

To receive the Employment Allowance, you need to claim it every tax year. You can file the claim as part of your PAYE submission process, either with HM Revenue and Customs (HMRC) Basic PAYE tools or your own payroll software.

If using your software, indicate ‘Yes’ in the ‘Employment Allowance indicator’ box when sending an Employment Payment Summary (EPS) to HMRC.

SMEs brace for employer NIC rise

In anticipation of changes to National Insurance Contributions (NICs), small businesses are preparing to bear the financial impact.

To mitigate these effects, small and medium-sized enterprises (SMEs) are considering raising prices and cutting jobs, which means that consumers and employees are likely to feel the repercussions.

The hospitality industry, in particular, is facing a bleak outlook due to its typically larger workforces. As many as 80% of pubs could become unprofitable as a result, potentially leading to widespread business closures and job losses.

The changes to Employment Allowance may offer relief for some SMEs and their payroll bills. However, those in the hardest-hit sectors will view it as an inadequate solution, akin to sticking a plaster over a gaping wound.