As explained in an earlier article, an employer can benefit by up to £10,500 for 2025/26 by claiming the national insurance (NI) employment allowance. However, a number of restrictions apply, including where companies are connected, for example, as part of a group.  

Restriction for connected companies 

Where a company is connected with another company or companies at the start of the tax year, only one of the companies can claim the employment allowance for that tax year. It is up to the companies to decide which company makes a claim.

Meaning of “connected” 

A company is connected with another company where one controls the other or where both are under the control of a third party. Control can be exercised in a number of ways, including by owning a majority (50%+) of the shares in the company. To determine if a person controls a company we look at that person’s interests in the company. We may also need to bring in interests held by the person’s associates depending on the circumstances. The definition of “associate” is quite broad and, for an individual, includes the person’s spouse/civil partner and their relatives (eg, parents and grandparents, children, brothers/sisters), amongst others.  

Rights held by associates are relevant when considering if two companies that are “substantially commercially interdependent” are connected companies. This is a subjective test, taking into account the extent of any financial, economic and organisational ties. The test is also relevant for other tax purposes, including corporation tax, and HMRC provide examples in that context, starting at CTM03785.  

Where two companies are not substantially commercially interdependent there is no need to bring in the rights of associates when determining if a person controls a company.  

Special tests also apply to determine whether companies are connected where there are fixed-rate preference shares, loan creditors, or rights held in trust.   

Newly-incorporated companies 

A company that is incorporated after 6 April in a tax year can claim the employment allowance for that tax year. This is the case even where the company is a newly formed subsidiary of another company. The company will need to consider if it has any connected companies at the start of the next tax year.  

Other factors 

The rules described above apply to companies. There is no need to take into account sole traders or partnerships other than limited liability partnerships. However, a similar restriction applies regarding charities.  

Complicated rules can apply where an employer has more than one PAYE scheme. We’ll look at that in a separate article.  

Further information 

• ICAEW Tack Track podcast: Associated companies: a family affair | ICAEW
• Connected companies and Employment Allowance: further guidance for employers and their agents - GOV.UK 
• NIM06560 - Employment Allowance: Who can’t claim the Employment Allowance? Claims made through connected businesses or charities - HMRC internal manual - GOV.UK
• Section 3 and Schedule 1, National Insurance Contributions Act 2014 
• Section 450, Corporation Tax Act 2010 (meaning of "control")
• Section 448, Corporation Tax Act 2010 (meaning of “associate”)