How Employment Allowance Impacts Payroll in 2025/26

Increased Payroll Pressure: Rising Employer Costs in 2025/26

Businesses entering the 2025/26 tax year are facing unprecedented increases in employer costs. The most pronounced changes relate to national insurance contributions (NICs), with the secondary threshold (ST) reduced sharply from £9,100 to £5,000 per annum. This means employers begin paying NICs earlier on employees’ earnings.

In addition, the secondary Class 1 NIC rate has risen from 13.8% to 15%. This double increase hits employers hard, combining a lower earning threshold with a steeper rate. At the same time, substantial rises in the national minimum wage, particularly for young employees (up to 18% for some groups), add to the financial strain—especially in sectors like retail, hospitality, and childcare.

A Brighter Note: Improvements to Employment Allowance

Despite mounting employer costs, there is relief in the form of improvements to the employment allowance. Announced in the Autumn 2024 Budget and effective from April 2025, the following changes stand out:

• The employment allowance increases to £10,500 for 2025/26.
• The previous £100,000 upper eligibility threshold has been removed.

Employers can now claim up to £10,500 against their Class 1 NIC liability, starting 6 April 2025. Eligible businesses can apply this allowance until the limit is exhausted or the tax year ends, whichever comes first.

With the removal of the £100,000 cap, many more employers are now eligible, provided they meet additional criteria. While smaller employers benefit most tangibly, larger businesses have noted that the raised allowance, though welcome, only modestly offsets the rapidly escalating costs.

Understanding Connected Companies and Eligibility

Employers should be aware of new HMRC guidance on connected companies. Under the National Insurance Contributions Act 2014, companies are considered connected if one controls the other, or both are under common control. However, deeper factors must also be evaluated:
• Financial Interdependence: Does one company provide financial support to another?
• Economic Interdependence: Do company activities benefit each other or share clients?
• Organisational Interdependence: Are employees or resources shared?

Properly determining these relationships is crucial. The updated guidance and [National Insurance Manual](https://www.gov.uk/hmrc-internal-manuals/national-insurance-manual/nim06500) offer detailed scenarios to aid decision-making.

Steps to Claim the Employment Allowance

Claiming the employment allowance is straightforward, but attention to process is key:

1. Assess Eligibility: Check your business qualifies under the new rules. 2. Claim Promptly: You may claim at any point during the tax year—claim early for maximum benefit. 3. Use Payroll Software: Within your employment payment summary (EPS), select the employment allowance indicator and submit the EPS to HMRC. 4. Backdate Claims: If eligible, companies can claim for up to the previous four tax years. Each year’s claim must be made using a separate EPS, subject to historic rates and criteria.

Tip: Regularly review your company’s eligibility, especially if your business or group structure changes.

What This Means for Your Business

While the raised employment allowance offers some financial reprieve, payroll professionals must carefully monitor continuing compliance and the interplay of new thresholds, rates, and eligibility requirements. Staying informed and pro-active on claims can reduce costs and avoid missed opportunities, particularly for small to mid-tier firms.

Take Action

• Review your payroll processes for compliance with 2025/26 rules.
• Evaluate your position on the connected companies criteria.
• Submit your employment allowance claim early via payroll software.
• Consider consulting a payroll specialist or using CIPP resources for additional support.

The regulatory landscape is shifting. Proactive management is the key to navigating increased costs and maximising available reliefs.