Introduction: Understanding Employment Allowance in 2025

Are you a small business owner with just one employee? Wondering if you qualify for Employment Allowance despite your compact team size? This common tax question confuses many small business owners, especially those operating with minimal staff. At MSA Accountants, we understand the complexities of UK tax legislation and how important it is to maximise every available tax relief for your business.

Employment Allowance represents a significant opportunity for eligible employers to reduce their National Insurance contributions (NICs) bill. From April 2025, this allowance has been substantially increased to £10,500 per year, making it more valuable than ever for qualifying businesses. But the key question remains: can a company with only one employee who is not a director claim this allowance?

Key Takeaway

Yes, a company with only one employee who is not a director can typically claim Employment Allowance, provided the employee earns above the Secondary Threshold for National Insurance contributions. This differs from single-director companies where the director is the only employee, which are generally not eligible.

Understanding the Eligibility Criteria

The Single Employee Scenario

The eligibility rules for Employment Allowance can seem complex, but understanding how they apply to your specific business structure is crucial. For companies with a single employee structure, here's what you need to know:

• Single employee who is not a director: A company employing just one person who is not a director is generally eligible for Employment Allowance.
• Single director as sole employee: Limited companies with only one director who is also the only employee earning above the Secondary Threshold are specifically excluded from claiming Employment Allowance.

This distinction is important. The restrictions target "single-director companies where the sole director is the company's only employee" - not companies that employ a single regular employee.

Secondary Threshold Requirements

For your company to benefit from Employment Allowance:

• Your employee must be paid above the Secondary Threshold for NICs (set at £5,000 per year from April 2025)
• You must be making Class 1 National Insurance contributions as an employer
• Your annual Class 1 NICs liability must have been below the threshold in the previous tax year (though this £100,000 cap is being removed from April 2025)

Changes to Employment Allowance in 2025/26

The 2024 Autumn Budget brought significant changes to Employment Allowance that business owners should be aware of:

1. Increased allowance: The maximum allowance has been raised from £5,000 to £10,500 per year
2. Higher employer NICs rate: Employers' National Insurance contribution rates have increased from 13.8% to 15%
3. Lower Secondary Threshold: The tax-free employers' NIC band has dropped from £9,100 to £5,000 per employee
4. Removal of upper cap: From April 2025, the £100,000 cap on the previous year's employer NICs bill for eligibility has been removed

These changes make Employment Allowance more valuable for eligible businesses while also increasing the overall NICs burden for employers.

Practical Examples

Example 1: Single Employee Company

Consider a company with one director and one regular employee:

• The director takes a minimal salary below the Secondary Threshold
• The employee earns £15,000 per year, which is above the Secondary Threshold

In this scenario, the company would be eligible for Employment Allowance because there is at least one employee (who is not the director) earning above the Secondary Threshold.

Example 2: Employee Joins Mid-Year

A single-director company starts the tax year with just the director as the only employee, making it initially ineligible. However, if during the tax year the company hires an additional employee who is paid above the Secondary Threshold, the company becomes eligible to receive the full Employment Allowance for that tax year.

Exclusions and Special Cases

While many small businesses can benefit from Employment Allowance, certain exclusions apply:

• Businesses primarily working in the public sector (more than 50% of work)
• Employees whose earnings fall within IR35 'off-payroll working rules'
• Personal, household, or domestic workers (like nannies or gardeners) - unless they're carers or support workers
• Connected companies where another company in the group already claims the allowance

How to Claim Employment Allowance

Claiming Employment Allowance is relatively straightforward:

1. You can claim at any point during the tax year through your Real-Time Information (RTI) submissions to HMRC
2. If using payroll software, enter 'Yes' in the 'Employment Allowance indicator' field when submitting your Employment Payment Summary (EPS)
3. If using HMRC's Basic PAYE Tools, select 'Change employer details' from the 'Employer' menu

Remember that you need to submit your claim every tax year to continue receiving the allowance.

Maximising Your Tax Efficiency

At MSA Accountants, we recommend conducting a comprehensive review of your payroll structure to ensure you're taking full advantage of available tax reliefs, including Employment Allowance. For businesses with a single employee who is not a director, claiming this allowance could save you up to £10,500 in the 2025/26 tax year.

Conclusion: Get Expert Help with Your Employment Allowance Claim

Understanding the nuances of Employment Allowance eligibility is essential for maximising your business's tax efficiency. If you're unsure about your eligibility or need assistance with your claim, MSA Accountants can help.

Our team of expert accountants specialises in helping small businesses navigate complex tax regulations and identify every possible legitimate tax saving. Contact us today for a personalised consultation and ensure you're not missing out on valuable tax relief opportunities.

Disclaimer: This information is accurate as of May 2025. Tax legislation may change, and individual circumstances vary. Please consult with a qualified accountant for advice specific to your situation.

FAQs about Employment Allowance for Single Employee Companies

1. Can I claim Employment Allowance if I'm the director and the only employee?

No, if you're a limited company with only one director who is also the only employee earning above the Secondary Threshold, you cannot claim Employment Allowance.

2. How much can I save with Employment Allowance in 2025/26?

Eligible employers can reduce their annual National Insurance bill by up to £10,500 in the 2025/26 tax year.

3. Do I need to claim Employment Allowance every year?

Yes, you need to submit a claim each tax year to continue receiving the allowance.

4. What happens if my employee leaves during the tax year?

If your employee leaves before the end of the tax year and you haven't used your full allowance, you may continue to claim against any remaining employer NICs liability until the end of that tax year.

5. Will hiring a second employee affect my Employment Allowance claim?

Adding more employees doesn't affect your eligibility, but remember that the £10,500 allowance applies to your entire business, not per employee.

6. How does the April 2025 change to the Secondary Threshold affect my claim?

With the Secondary Threshold lowering to £5,000 from April 2025, more of your employee's salary will be subject to employer NICs, potentially increasing your liability while also making the higher £10,500 allowance more valuable.

7. Can I claim Employment Allowance retroactively?

Yes, you may be able to claim for up to the previous four tax years if you were eligible but haven't claimed.