If you’re a sole director running a limited company, you’ve probably heard that you can’t claim Employment Allowance (EA), and in most cases, that’s true. HMRC’s rules say that companies where the only person on the payroll is a director aren’t eligible ...
Trying to game the system with the Employment Allowance will likely backfire!
But what if you bring in a temporary employee, even just for a short stint? Can you unlock EA for the whole year? Surprisingly, yes. According to the National Insurance Contributions Act 2014 (NICA 2014), if your company incurs a qualifying liability - that's secondary Class 1 National Insurance - for someone who is not a director, you become eligible to claim Employment Allowance for the tax year.
"This is true even if the employee only works with you briefly!"
As long as they are paid above the secondary threshold and the NIC is actually incurred, though the legislation doesn't say the employee must be on the books all year. It's about liability, not longevity.
Once this qualifying NIC is triggered by employing someone else, you can claim EA and apply it against the full year's employer NIC liability - including that of the director. That said, this only applies to the tax year in which the non-director employee was on payroll. If they leave and you're back to being a one-man band the following year, you won't be eligible again unless you bring on another employee.
Now, a word of warning. HMRC has anti-avoidance measures built into this. If you try to be clever and hire a 'ghost' employee, i.e. someone who doesn't really work for you, you're likely to fall foul of sections 2(10) to (13) of NICA 2014. If you're going to claim EA based on employing someone, you need to prove that it was a genuine employment. That means having a signed employment contract, time and attendance records, payslips, or anything else that shows the person actually worked for you and got paid for it.
Now, we're in the 2025/26 tax year, HMRC is tightening the rules around connected companies, so if you operate more than one business, things are about to get trickier!
Under Part 1 of Schedule 1 of NICA 2014, two companies are considered 'connected' if one controls the other or if both are under the control of the same person or people. But that's not the only test. You'll also need to consider whether there's substantial commercial, financial, economic, or organisational interdependence between the companies. This determines whether multiple companies can each claim EA or if only one gets the benefit.
So, the bottom line: Yes, you can claim EA as a sole director if you employ someone else - even briefly - and incur NIC on their wages. But it needs to be real employment, properly documented, and your eligibility resets each tax year based on who's on your payroll.
"Trying to game the system will likely backfire!"
Still, it's a useful bit of relief if you're growing your team even temporarily, and it helps chip away at those employer costs. Just make sure you keep the paperwork tidy and stay on top of the evolving rules.
Until next time ...
ROGER EDDOWES Business Godparent
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about employment allowance and are wondering if you can claim it, it may be a great idea to call me on 01908 774320 and let's see how I can help.
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Roger trained at Edward Thomas Peirson & Sons in Market Harborough before working at Hartwell & Co, followed by Chancery, as a partner. He started Essendon Accounts and Tax with Helen Beaumont in 2014 as a general practitioner with a hands-on approach.
Roger loves getting his hands dirty, working with emerging, small-to-medium and family businesses to ensure they receive the best possible accountancy advice. Roger utilises an extensive network of business contacts to leverage the best guidance and practical solutions.
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