First, a bit of background. The PAYE you must pay to HMRC has three components: (1) the income tax and (2) the National Insurance Contribution (NIC) that you deduct from each employee’s gross pay, plus (3) a NIC that comes from the employer.

To encourage job creation, the Employment Allowance was introduced to help toward the latter – the green piece of pie.

It effectively allows you to underpay the employer’s NIC. Since 6 April 2025 the EA covers up to £10,500 in a tax year.

Many small employers no longer pay any National Insurance at all. Yay!

A couple of examples:

Eligibility

• A limited company where the director is the only employee paid above the NI Secondary Threshold (£5000 pa) doesn’t qualify.
• You won’t qualify if most of your work fulfils public sector functions – e.g. rubbish collection, NHS services.
• You won’t qualify if you employ someone for personal or household work – e.g. gardener,  nanny – unless they’re a care or support worker.

How to Claim

If you use a payroll agent, they should take care of this. Otherwise, you’ll need to use your own payroll software or HMRC’s Basic PAYE Tools to file an Employer Payment Summary (EPS) every tax year, telling HMRC you are using the Allowance to cut your payments.

Things to watch out for

• If your company belongs to a group of companies, only one can claim the allowance.
• If a company has control of another company, or both companies are under the control of the same person or persons, these companies are connected. Only one of the connected companies can claim the Allowance.
• You can only claim the Employment Allowance against one PAYE scheme even if your business runs multiple schemes.

Further information

Gov.uk overview and detailed guidance – the rules and regs

Historical

The Employment Allowance came into effect in April 2014. At the same time, employers ceased to be able to reclaim statutory sick pay. The Allowance has been increased multiple times, most recently and dramatically in April 2025.

Who gets it – and who doesn’t?

• It’s a criminal offence to not pay someone the National Minimum Wage
• It applies to most workers over school leaving age including casuals, part-timers and agency workers
• All businesses must comply – regardless of size

• It doesn’t apply to self-employed people or company directors

Why NMW matters to employers

If your company has underpaid its workers, the consequences could be severe:

Arrears

You must pay arrears to the worker immediately and you may end up paying more than you would have if you had paid the correct amount to start with. In one instance, a national retailer was forced to make back payments of £193,000 for almost 3,500 workers after it required them to be at work before and after opening hours without pay.

Naming and shaming

HMRC will now publicly name any employer, big or small, who breaks minimum wage law.

Penalties and prosecution

On top of the arrears, employers risk financial penalties of up to £20,000.

Criminal prosecution is rare but the most serious cases can be heard in a Crown Court, meaning that there’s a potential for an unlimited fine.

How is NMW enforced?

HMRC have the power to check your wages at any time – it’s your responsibility as an employer to keep records proving compliance with NMW and you have to keep these for 3 years.  You could be randomly targeted or a worker’s complaint could trigger an investigation.

Where can I get more help?

The rates change in April each year. Rates for previous years can be found at gov.uk.

A good payroll provider will watch out for NMW compliance issues as part of the service.

• ACAS 0300 123 1100 (Mon to Fri 8am-8pm, Sat 9am-1pm)

ACAS gives free impartial advice to employers and workers.

• Pay and Work Rights at Gov.UK

Follow this link to report NMW breaches.

This article updated Oct 2024.

Image credit: University of Liverpool Faculty of Health (CC BY 2.0)