In light of increased employment costs for employers, Samantha O’Sullivan discusses some of the intricacies of the employment allowance and answers the questions payroll professionals have been asking.
It is of no surprise to anyone processing payrolls in the 2025/2026 tax year that the cost to employers has increased massively when compared to the previous tax year.
The biggest increase has taken place in the form of employer national insurance contributions (NICs). Not only did the secondary threshold (ST) reduce from £9,100 to £5,000 per annum, resulting in employers paying NICs earlier on their employee’s earnings, but the percentage rate of secondary Class 1 NICs increased from 13.8% to 15% for the current tax year. This comes as a double whammy for employers, meaning they’ll pay secondary Class 1 NICs from an earlier point, and at a higher rate.
Another rapidly increasing cost surrounds the national minimum wage, especially for the youngest employees. Apprentices and 16–17-year-olds received an 18% pay increase, with 18–20-year-olds receiving an uplift of 16.3%. This will have hit especially hard for those industries with a predominantly younger workforce, including retail, hospitality and childcare providers.
But it’s not all bad news…
Alongside the news of the decrease to the ST and the increase to the rate of secondary Class 1 NICs, it was announced in the autumn Budget 2024 that changes were taking place for the better, for the employment allowance. The changes announced were that:
- employment allowance would increase to £10,500 for 2025/2026
- the £100,000 threshold would be removed for eligibility criteria.
The employment allowance reduces employers’ national insurance (NI) liability by up to £10,500 from 6 April 2025. Eligible employers can claim the allowance against their Class 1 NI liability until the £10,500 limit has been claimed or until the end of the tax year, whichever comes first.
From April 2025, the £100,000 eligibility cap is being removed. Therefore, employers with a Class 1 NI liability of greater than £100,000 in the previous tax year could now be eligible for the employment allowance, providing they meet the other eligibility criteria. This policy measure was introduced to ensure more employers than ever before would be eligible to claim the allowance, to soften the blow of the increased employer Class 1 NICs.
Now, we’re fully aware that even if the intention was that this would help more employers than ever before, it’s only the smallest employers this is making a difference to. Large employers have stressed that even now they’re eligible to claim the allowance, with the threshold being lifted, £10,500 is a drop in the ocean when its purpose was to support employers with increasing NI costs.
Connected companies
With the changes to employment allowance taking effect from the 2025/2026 tax year, HMRC updated guidance for employers and their agents to help determine if companies are connected.
The National Insurance Contributions Act 2014 is the legislation that sets out the rulings for connected companies. Part 1 of Schedule 1 sets out the basic rules of determining whether companies are connected: “Two companies are ‘connected’ with one another if (a) one of the two has control of the other, or (b) both are under the control of the same person or persons.”
But that’s not all you need to consider if there’s any element of substantial commercial interdependence, including:
- financial interdependence, for example one company gives financial support to the other company
- economic interdependence, for example the activities of one company benefit the other or they involve common customers
- organisational interdependence, for example the companies share employees.
There’s further reading in the National Insurance Manual from pages NIM06590 onwards.
The updated guidance, along with the legislation, should support you in making an informed decision on whether two companies are connected for the purposes of claiming employment allowance.
How and when to claim
If you or your clients are eligible to claim the employment allowance, you can claim at any time in the tax year. The earlier you claim, the sooner you’ll get the allowance. You can claim via your payroll software. You should have an employment allowance indicator on your employer payment summary (EPS). Simply put “yes” in the field and send the EPS to HMRC as normal.
Do remember that companies can claim for up to the previous four tax years, subject to eligibility criteria and the rate of the allowance in place at the time. To claim, you must report a separate EPS for each year’s claim.
