The business impact of Employment Allowance and NIC changes

The cost of Employment Allowance — a program designed to lessen the expense of employing staff — is due to increase in April 2025. This change was announced in the 2024 Autumn Budget with the aim to offset the rising National Insurance contributions (NICs) coming into force. But which businesses are eligible to claim the Employment Allowance, and how much will it actually lower the NIC costs? In this blog, we’ll break down what these changes mean, how to claim the allowance and what else businesses can do to mitigate the increasing NICs.

Understanding the Employment Allowance changes and National Insurance increases

The Employment Allowance, which reduces the annual secondary Class 1 National Insurance liability, was first announced in 2013 to encourage businesses to hire more workers and further support economic growth. From 6 April 2025, the employer NIC increases from 13.8% to 15%, enhancing how much employers pay HM Revenue & Customs (HMRC) on their workers’ earnings. Additionally, the secondary threshold, which dictates when employers start paying NIC, will decrease from £9,100 to £5,000 per year. This £5,000 threshold, which equates to £417 a month and £96 a week, will be in effect from 6 April 2025 to 5 April 2028. Overall, these NIC changes would result in employers paying a higher rate for more workers. However, the Employment Allowance increase is designed to lessen this impact, with the amount businesses can claim rising from £5,000 to £10,500. Employers who incur a secondary Class 1 NICs liability of more than £100,000 have previously been unable to claim, but this restriction will be completely removed from 6 April 2025, allowing all eligible businesses and charities to claim the support. The Autumn Budget stated these changes will result in 865,000 employers paying no NICs in 2025.

Who is eligible to claim Employment Allowance?

To be eligible for the Employment Allowance, a business or charity must be registered as an employer and have employees. Organisations must have two or more directors earning more than the secondary threshold to qualify, meaning single-director companies aren’t eligible. Other exemptions from the eligibility are payments to off-payroll workers (inside IR35) and those who work in domestic settings and businesses conducting more than 50% of their work in the public sector, such as local councils. Businesses in Northern Ireland, particularly those manufacturing or selling goods or wholesale electricity, may face additional limits from de minimis state aid, a form of government financial support. Businesses receiving this state aid must check how much they’ve received in total, as those exceeding the limit can’t claim Employment Allowance.

How to claim the Employment Allowance

Employment Allowance isn’t automatically applied, and you don’t need to wait for a formal confirmation of your eligibility. To claim, if you use your own payroll software, all you need to do is put ‘Yes’ in the ‘Employment Allowance indicator’ field when sending an Employment Payment Summary (EPS) to HMRC. Otherwise, you can use HMRC’s Basic PAYE Tools. You need to claim the allowance every tax year (6 April to 5 April) to receive the payment. However, you can claim it at any time of the year — the earlier you claim, the sooner you receive the allowance. It will then reduce the amount you pay in NICs every time you run payroll until you’ve used the full allowance or the tax year ends.

The financial impact of Employment Allowance changes: who gains the most?

Following the Employment Allowance changes and NIC increases, the government has estimated that approximately 250,000 employers will see a decrease in secondary Class 1 NICs liability, and 820,000 employers’ costs may stay the same, but 940,000 will see an increase. To help provide an understanding of what these changes could look like for individual businesses, we’ve prepared some examples below using broad numbers to simply illustrate the hypothetical savings or additional costs. Example 1: Small business with three employees, each earning £25,000 per year Total payroll: £75,000 Payroll after secondary threshold: £60,000 (minus £5,000 per employer) Total Employer NICs (15% of payroll) for all employees: £9,000 Final NIC cost incorporating Employment Allowance: £9,000 - £10,500 = £0 (fully covered) Before April 2025, the same payroll would have resulted in a final Employer NIC cost of £1,583. Example 2: Medium business with 15 employees, each earning £35,000 per year Total payroll: £525,000 Payroll after secondary threshold: £450,000 (minus £5,000 per employer) Total Employer NICs (15% of payroll) for all employees: £67,500 Final NIC cost incorporating Employment Allowance: £67,500 - £10,500 = £57,000 Before April 2025, the same payroll would have resulted in a final Employer NIC cost of £48,613. Example 3: Large business with 100 employees, each earning £50,000 per year Total payroll: £5,000,000 Payroll after secondary threshold: £4,500,000 Total Employer NICs (15%) for all employees: £675,000 Final NIC cost incorporating Employment Allowance: £675,000 - £10,500 = £664,500 Before April 2025, the same payroll would have resulted in £564,420. Even with the Employment Allowance, which this business would have previously been exempt from, the final NIC is still around £100,000 more due to the higher NIC rate and lower threshold.

Potential financial challenges of Employment Allowance changes and how to overcome them

As seen in our examples, the Employment Allowance changes might not offset the costs associated with the NIC increases. Unfortunately, while more businesses can claim the allowance and the amount has increased, it still might not be enough. For a company having to pay hundreds of thousands extra in NICs, a £10,500 relief is a drop in the ocean.

The Office for Budget Responsibility (OBR) predicts employers will pass on 60% of the higher NIC costs to workers and consumers through lower wages and higher prices. However, businesses can reduce this financial burden without risking losing quality staff to competitors and harming customer loyalty. It’s important to get on top of financial reporting, bookkeeping, and planning to effectively manage cash flow and highlight any missed budgeting, as well as look for opportunities to streamline the workload. You can find more ways to lower the financial burden in our breakdown of the National Insurance increasing costs. While the Employment Allowance changes will protect many small businesses from the growing NIC expenses, many companies may still face financial hurdles. These challenges reinforce the importance of productivity and efficiency to minimise the financial impact, maintain competitiveness, and protect employees and customers.

The information on this website is provided free of charge and is intended to be helpful to a wide range of businesses. Because of its general nature the information cannot be taken as comprehensive and they do not constitute and should never be used as a substitute for legal, accounting, tax or professional advice. We cannot guarantee that the information applies to the individual circumstances of your business. Despite our best efforts it is possible that some information may be out of date. Any reliance you place on information found on this site or linked to on other websites will be at your own risk.