Employment allowance allows businesses to reduce their National Insurance (NI) contributions each tax year. For construction firms, engineers, and tech-focused businesses – sectors we specialise in – employment allowance can make a significant difference in managing operational costs and improving cashflow. This blog covers everything from eligibility criteria and how to apply to the benefits businesses can gain during the 2025/26 tax year.
What exactly is the employment allowance?
Employment allowance is a UK government scheme allowing eligible businesses to reduce their annual employer’s Class 1 National Insurance contributions by up to £10,500. Introduced to support small and medium-sized businesses, this allowance provides meaningful relief, freeing up funds to reinvest in growth, innovation, or team expansion.
According to HMRC, thousands of businesses fail to claim their full entitlement each year, missing a simple way to boost their financial position. By understanding and applying for employment allowance, your business can directly reduce expenses and allocate funds more effectively.
Who is eligible?
Not every business qualifies for employment allowance. Generally, you’re eligible if:
- The rules are different if you claim for previous tax years.
- You employ staff and pay Class 1 employer’s National Insurance contributions.
- Your business operates within the private sector or is a charity or amateur sports club.
You cannot claim if you are the sole director of the company and the only employee paid above the secondary threshold, or if you employ someone for personal, household, or domestic work (unless they are a care or support worker). Additionally, you cannot claim if more than half of your work is in the public sector, or if your business exceeds the de minimis state aid limits.
How does employment allowance benefit your business?
Employment allowance directly reduces the financial burden of your National Insurance bill. For many small to medium-sized businesses, particularly those operating in high-cost sectors like construction, engineering, and tech, this allowance can significantly improve cashflow and profitability.
A 2024 Office for National Statistics (ONS) report highlighted that over 60% of small businesses cite tax and NI costs as key financial constraints. Reducing these expenses through employment allowance can provide crucial breathing space to help your business invest in essential tools, equipment upgrades, or hiring skilled employees.
How to claim
Claiming the allowance is straightforward, but many businesses still find it challenging or overlook the process. You can claim employment allowance through your payroll software or via HMRC’s PAYE Online service.
Here’s a quick breakdown of the steps:
- Confirm eligibility: Check your eligibility criteria to ensure you qualify.
- Notify HMRC: Claim directly through your payroll software by selecting the employment allowance option or via HMRC’s PAYE Online service.
- Track your allowance: Your payroll software or HMRC’s online service will automatically apply the allowance to your NI contributions until the £10,500 cap is reached.
Remember, you must make a new claim for each tax year if you continue to be eligible. If your circumstances change (for example, if you become the only director with no other employees above the secondary threshold), you must inform HMRC and stop claiming.
Common mistakes when claiming
Businesses often make mistakes when claiming the allowance, causing delays or under-utilisation of the benefit. Common pitfalls include:
- Incorrect eligibility assessment: Failing to assess whether your business qualifies for the allowance.
- Late or missed applications: Delaying applications can result in missed months of NI savings.
- Not updating payroll records: Ensure your payroll software is updated and correctly set to reflect the claim.
Our PBA Accountants team can help you avoid these common mistakes and maximise your entitlement.
Sector-specific benefits
Employment allowance particularly benefits industries like construction, engineering, and technology, where overhead costs can be high and margins tight. For instance:
- Construction firms: An employment allowance can help cover costs associated with hiring skilled tradespeople and freeing capital to invest in safety training or new technology.
- Engineering companies: Savings on NI contributions provide more budget flexibility for innovation, research, or advanced machinery.
- Tech-focused businesses: Additional funds from NI savings can support software development, R&D, and attracting talent.
Next steps
This allowance is a valuable, underutilised opportunity for businesses to significantly reduce their National Insurance costs. Understanding the eligibility criteria, application process, and strategic advantages can unlock significant savings and reinvestment opportunities for your business.
If you need help applying or maximising employment allowance for your construction, engineering, or tech-focused business, our experts at PBA Accountants are here to help.
Contact us today and ensure you’re not missing out on valuable savings – and put the employment allowance to work for your business this tax year.