Employment Allowance for start-ups explained

For start-ups across the UK, the government’s Employment Allowance could be a good way to save money as your business grows.

You could claim up to £10,500 (from April 2025) from your start-up’s National Insurance Contributions each year, helping to free up cash to invest in your business and reduce your financial obligations as you hire new staff.

It could make a huge difference for start-ups that are concerned about the extra costs of hiring new employees.

Beyond wages and extra equipment, your business must also budget for and pay National Insurance contributions (NICs) for employees – but you could cut this bill significantly with the Employment Allowance.

Read on to find out if your business is eligible to receive Employment Allowance and discover how you can make a claim.

What are National Insurance Contributions?

National Insurance Contributions (NICs) are a form of tax.

Both UK workers and employers pay this tax to help fund state benefits, such as the NHS, unemployment benefits, and state pensions.

NICs are automatically deducted from employees’ pay, while self-employed people pay their NICs when they file their tax returns.

Employers also pay NICs for their employees.

Paying NICs is important because it helps people qualify for certain government benefits and supports the nation’s welfare system.

NICs are categorised into different classes, each applying to different types of earners.

Learn more about National Insurance classes.

What is Employment Allowance?

Employment Allowance is a government initiative that can help UK businesses reduce their Class 1 National Insurance (NI) costs.

It is designed to support smaller businesses by easing the financial burden of hiring staff and encouraging job creation.

The 2024 Autumn Budget increased the allowance from the current £5,000 threshold to a higher £10,500 threshold.

Eligible employers can now reduce their NICs bill by up to £10,500 per year.

The government has also removed the previous £100,000 threshold, so all employers are eligible to apply for Employment Allowance.

The initiative only applies to the employer’s liability – employee contribution is unaffected and is typically deducted from staff salaries automatically.

The increase in Employment Allowance will help small businesses in managing the impact of:

• the rise in the Employer National Insurance Contributions Rate from 13.8% to 15%
• the reduction in the secondary threshold, which lowers the point at which employers start paying NICs from £9,100 to £5,000 per year.

These changes come into effect in April 2025.

How does Employment Allowance work?

Employment Allowance allows start-ups to claim money off their Class 1 National Insurance liability.

This sum applies to a business’s total contributions rather than a per-employee allowance.

For example, if you have four employees who each have a National Insurance contribution of £250 a month (or £3,000 a year), your total liability for the year will be £12,000.

As of April 2025, you can claim the first £10,500 as part of the Employment Allowance and only pay the remaining £1,500.

If your total liability for the year is less than £10,500, you will not have to pay anything.

However, your business is not entitled to the remaining allowance for other business purposes.

Learn more about your business’s tax requirements.

How does Employment Allowance help start-ups?

Reduces employment costs

The Employment Allowance scheme directly reduces employment costs by allowing eligible businesses to claim a reduction in their NI contributions.

This could ease the financial impact associated with hiring staff, making it easier for start-ups to grow their teams.

Encourages recruitment

With lower employment expenses, you may be encouraged to recruit more employees.

Learn more about how to hire staff.

Hiring staff could be seen as a positive sign of business growth as you bring people on board who have the necessary skills to push your business forward.

Read our first-time employer’s guide to hiring staff.

Eases cash flow pressures

By reducing the amount of payable National Insurance, you could use the scheme to improve your cash flow, allowing you to allocate necessary funds to other areas of your business.

In the early stages of a start-up, this flexibility could be beneficial for business development.

Learn more about recognising challenges to cash flow and how to solve them.

Helps to reduce operational costs

Lower employment costs could help start-ups reduce their overall operational expenses.

This could lead to more competitive pricing or allow you to reinvest the savings into developing your products and services to improve your market position.

Is your start-up eligible for Employment Allowance?

Not all businesses are eligible for Employment Allowance.

You may be eligible for Employment Allowance if:

• you run a business or charity
• your total Class 1 National Insurance liability was less than £100,000 in the previous tax year – this threshold restriction will be removed from 1 April 2025)
• you have one paid employee who is not a director and who earns above the Class 1 National Insurance Secondary Threshold.

You might also be eligible if you are a limited company whose employees are all directors, but at least two of them earn more than the Class 1 National Insurance Secondary Threshold.

Certain employees cannot be included in your claim for Employment Allowance, such as:

• staff who are classed as an ‘employment intermediary’ and whose earnings are within IR35 ‘off-payroll working rules’
• individuals who you employ for personal, household, or domestic work (unless they are a care or support worker)
• freelancers and contractors.

You are also not eligible if you’re a public body or do more than half of your work in the public sector (although there are exceptions for charities).

There are further exceptions for public sector businesses, such as those that provide IT services for a government or local authorities.

There are also exceptions for businesses that provide security or cleaning services for a public building.

Start-ups in Northern Ireland should also check whether Employment Allowance counts as ‘de minimis state aid’.

This regulation applies across the EU (and Northern Ireland due to post-Brexit trade agreements) and limits the amount of government support your start-up can receive over a three-year period.

It is a good idea to check your eligibility each tax year.

How do I claim Employment Allowance?

Claiming Employment Allowance isn’t automatic – you must tell HMRC that you qualify and want to claim.

You can claim the Employment Allowance at any point during the tax year when you submit your Real Time Information (RTI) to HMRC.

Once you claim, you’ll pay less in employer NICs each month until you reach the limit of £10,500 in the 2025/26 tax year.

If you use payroll software, enter ‘Yes’ in the Employment Allowance indicator field the next time you submit your Employment Payment Summary (EPS) to HMRC.

You can also claim Employment Allowance using Basic PAYE Tools by following the HMRC’s guidance:

• select your employer on the home page
• select ‘Change employer details’
• select ‘Yes’ in the ‘Employment Allowance indicator’ field
• answer whether de minimis state aid rules apply, and if so, you should select the relevant business sectors
• submit your Employer Payment Summary.

It could be helpful to make this claim at the start of the tax year to make the most of your allowance, but you can claim at any point by using the HMRC’s Real Time Information measures.

Once your claim has been submitted, you can start accruing your allowance immediately.

Do I need to tell HMRC only once?

You must apply for the Employment Allowance every tax year to qualify.

You can’t carry over any unused allowance to the following year.

If your circumstances change and you no longer qualify, you will need to pay back the allowance.

Can I claim for past years?

You can backdate your claim for the previous four tax years if you haven't claimed Employment Allowance before.

You cannot make four years’ worth of claims in a single application, so you will need separate Employment Payment Summaries for each year.

Once those forms have been submitted, HMRC will offset your backdated allowances against any future National Insurance liabilities or refund you the amount.

You must keep any records related to Employment Allowance claims for at least three years after the tax year you have claimed for.

These documents should demonstrate why you were entitled to the claim, how much allowance was used, and what liabilities you have claimed for.

Discover more ways to minimise your tax liability.

How to stop claiming Employment Allowance

Claiming Employment Allowance isn’t a legal requirement for small businesses, so if you want to stop claiming it, you can.

Simply stop your Employment Allowance claim by selecting ‘No’ in the Employment Allowance indicator field when you next submit an Employment Payment Summary.

You may only want to do this if your business circumstances change, and you no longer meet the eligibility requirements.

This might be the case if you no longer have an employee who earns above the Class 1 National Insurance Secondary Threshold.

For now, it will also apply if your Class 1 National Insurance liability in the previous year exceeds £100,000.

Remember, though, that this threshold restriction will be removed on 1 April 2025.

You don’t need to stop your claim if you have reached the £10,500 annual threshold or if you no longer have any eligible employees – you can still claim the allowance for the rest of the tax year.

If you end your claim, any allowance you’ve been given will be removed, and you will have to pay any Class 1 National Insurance liability.

Are self-employed people eligible for Employment Allowance?

Self-employed individual paying Class 2 and Class 4 NICs on their earnings are not eligible for the Employment Allowance.

However, you can claim the allowance for any staff members on your payroll for whom your business pays employer Class 1 NICs on their earnings.

If you run your business as a partnership and you have employees, you can also claim Employment Allowance if you pay employer Class 1 NICs on their earnings.

Other government allowances for small businesses

Employment Allowance is just one of several government initiatives that could help your start-up save money.

You might also be eligible for:

• Mileage allowance – covers travel costs in your personal vehicle
• HMRC’s 24-month rule – allows contractors to claim travel and accommodation costs when they work at a temporary workplace
• Research and development (R&D) tax relief – help businesses reclaim the money spent on research and development.

Read about other expenses that your business can claim.

By taking advantage of these schemes, you could cut costs and generate extra cash to support your business’s growth.

Before proceeding, consider consulting with an accountant or financial expert who can help you determine the allowances that best suit your business.

If your start-up needs additional funding to help support its growth, you might consider a Start Up Loan.

Start Up Loans are personal loans for business purposes of up to £25,000 at a fixed 6% interest, plus a year of free business mentoring.

Remember – it’s important to stay updated

Rules and regulations change, so staying current on government changes is important to maximise your benefits.

Regularly check official sources and consult experts to keep your business on track.

Remember, if you use payroll software, check that it is up-to-date and correctly configured to accurately calculate and apply the allowance to your NICs.

Consider reviewing your payroll settings regularly to maintain compliance and maximise the financial benefits for your business.