The employment allowance is a valuable tax relief for eligible employers, including limited companies, allowing them to reduce their National Insurance Contributions (NICs) liability by up to £5,000. For the 2025/26 tax year, the employment allowance can be claimed by companies with an employer NICs liability of £5,000 or less in the previous tax year, provided certain conditions are met. Companies that have been subject to a penalty for not filing their tax returns on time may not be eligible to claim the employment allowance for a period of one year.
Eligibility Criteria for Limited Companies
To be eligible for the employment allowance, a limited company must be a business, such as a personal service company or a director-only company. The company must also be liable for employer NICs, which are typically paid on the salaries of employees, including directors. For example, if a company has two directors, each with a salary of £50,000, the employer NICs liability would be approximately £7,348, based on a 15% NICs rate. In this case, the company would not be eligible for the full £5,000 employment allowance, but could claim a proportion of it.
De Minimis State Aid Rule
One of the key eligibility criteria for the employment allowance is that the company must not be in breach of the de minimis state aid rule. This rule states that a company can only receive up to €200,000 of state aid over a three-year period, including the current tax year. For example, if a company received a £30,000 government grant in the 2022/23 tax year, and a £20,000 grant in the 2023/24 tax year, it would only be eligible for up to £150,000 of state aid in the 2025/26 tax year, including the employment allowance.
IR35 Contractors and the Employment Allowance
IR35 contractors, who are deemed employees for tax purposes, may be eligible for the employment allowance if they are paid through a limited company. However, the company must meet the eligibility criteria, including being liable for employer NICs. For example, if an IR35 contractor has a salary of £80,000, and the company pays 15% employer NICs on this salary, the company's employer NICs liability would be approximately £10,440. In this case, the company could claim the full £5,000 employment allowance, reducing its NICs liability to £5,440.
Claiming the Employment Allowance
To claim the employment allowance, a limited company must submit an Employer Payment Summary (EPS) to HMRC, stating the company's intention to claim the allowance. The EPS must be submitted by the 19th of the month following the end of the tax month in which the company's first PAYE payment is made. For example, if a company's first PAYE payment is made in April 2026, the EPS must be submitted by 19 May 2026. The company must also keep accurate records of its employer NICs liability, as HMRC may request these records to verify the company's eligibility for the employment allowance.
Employment Allowance and Company Size
The employment allowance is not limited to small companies, but can be claimed by companies of all sizes, provided they meet the eligibility criteria. However, larger companies may have a higher employer NICs liability, which could reduce the amount of the employment allowance they can claim. For example, a company with 10 employees, each with a salary of £40,000, would have an employer NICs liability of approximately £17,160. In this case, the company could claim the full £5,000 employment allowance, reducing its NICs liability to £12,160.
The employment allowance can provide significant savings for eligible limited companies. Review the eligibility criteria carefully, and use an Employers NI Calculator to determine the exact amount of employment allowance your company can claim. Seek professional guidance if you're unsure about your eligibility.