Model the Employment Allowance so ni_employer is net of it (split from #1918) #2459

Problem

ni_class_1_employer computes rates.employer × max(ni_class_1_income − 52 × secondary_threshold, 0) for every earner over 16, and ni_employer only adds that. The Employment Allowance (EA) is not modelled, so ni_employer, gov_tax, employer_cost and the employer-NI incidence variables are all gross of the EA.

OBR's and HMRC's employer NICs figures are net of it. Employers offset the EA against their secondary Class 1 payments through payroll, so it never reaches receipts.

#1918 lists the EA alongside the under-21 and apprentice zero rates and the veterans and freeport reliefs. This issue takes the EA on its own for two reasons: it is the largest of those gaps from 2025-26, and it is the only one that needs a design decision, because the EA is set per employer and the model has no employer entity.

Size (public figures)

Source: HMRC tax relief statistics, January 2026, section 3.14.

OBR's March 2026 EFO puts Class 1 employer NICs for 2025-26 at £145.3bn. The £7.4bn EA is 5.1% of that. A model with exactly the right pay but no EA would produce about £152.7bn.

• Under-21 zero rate. This is also missing (Employer NI ignores the under-21 and apprentice zero rates and the Employment Allowance #1918) and is worth another £1.9bn in 2025-26 (section 3.28).
• The 2025 changes and who they reach. The Autumn Budget 2024 employer NICs package yields +£23.77bn in 2025-26, net of the EA changes (HMRC impact note). The same note estimates about 1.2 million employers affected, with about 250,000 paying less. The Budget said 865,000 employers would pay no NICs.

Rules

• What it is. An annual amount per eligible employer, offset against the employer's total secondary Class 1 liability across its payroll. It is claimed through the EPS and covers secondary Class 1 only, not Class 1A or 1B. Any amount unused at the end of the tax year is lost. The legal basis is NICA 2014 ss.1–7 and Sch 1, with the amount in s.1(2)(a).

• Amounts.

  • £2,000: 2014-15 and 2015-16
  • £3,000: 2016-17 to 2019-20
  • £4,000: 2020-21 and 2021-22
  • £5,000: 2022-23 to 2024-25
  • £10,500: from 2025-26, including 2026-27

  Sources: past years, April 2020 note.

• £100,000 restriction. From 2020-21 to 2024-25, an employer could not claim if its secondary Class 1 liabilities in the previous tax year, together with those of connected employers, were £100,000 or more. The restriction was removed from 6 April 2025 by NICs (Secondary Class 1 Contributions) Act 2025 s.3, which omits NICA 2014 s.2(4B)-(4G).

• Exclusions (eligibility guidance):

  • public authorities that are not charities;
  • employers more than half of whose work is of a public nature, unless they are charities;
  • personal, household or domestic employment, except care and support workers;
  • deemed payments under the off-payroll rules (IR35);
  • from 6 April 2016, companies whose director is the only employee paid above the secondary threshold.

• Connected companies and charities. Only one employer in a connected group can claim, against one PAYE scheme. A business that controls a charity is not connected to it for this purpose.

• Subsidy limits. De minimis subsidy limits still apply in a few cases, for example Northern Ireland businesses that make or sell goods. This is negligible for modelling.

Modelling options

A household survey cannot tell which workers share an employer, so the EA cannot be attributed exactly. There are three options.

1. Aggregate scaling. ni_employer = ni_class_1_employer × (1 − s_t), where s_t is the EA's share of gross liability (about 4.8% in 2025-26). The total is right on the base data. The distribution is wrong, because the EA is a much bigger share of liability at small employers. Reforms to the EA can only be scored through a rough rule. Acceptable as a calibration stopgap only.

2. Per-employee share using firm size as a proxy. For worker i at an eligible employer in size band b:

   ea_i = L_i × min(1, EA_max / (n_b × L̄_b)) × take_up_b

   Here L_i is the worker's gross liability, n_b the number of employees and L̄_b the mean liability in the band. The inputs are size band, public sector and domestic employment, imputed in policyengine-uk-data; the FRS job-level establishment size is to be checked there. Calibrate to HMRC's cost and claimant counts and to the 865k employers paying nothing. This version responds to changes in the EA amount, the £100k rule, the rate and the threshold. Its caveats are that an establishment is not an enterprise, that connected groups can't be seen, and that single-director companies will be under-identified.

3. Parameterised effective allowance. Model the EA as a share of liability by employer-size band or earnings band, taken from HMRC distributional data. This is transparent and responds to reforms to first order.

Proposal: add the parameters and a person-level employment_allowance variable. Use option 2 when the dataset carries size inputs, and fall back to option 3's parameters when it doesn't, as in the household calculator. Apply the EA after the s.9A and s.9B zero rates, and coordinate with #1918.

Acceptance criteria

• Parameters for the EA amount from 2014-15 and for the £100,000 restriction from 2020-21 to 2024-25, with legislative references.
• ni_employer is net of the EA, and the gross statutory charge remains available. total_national_insurance, gov_tax, employer_cost, baseline_employer_cost and employer_ni_fixed_employer_cost_change use the net amount consistently.
• On the default dataset, the modelled EA is within about 15% of HMRC's £3.1bn (2023-24), £3.3bn (2024-25) and £7.4bn (2025-26 forecast; revisit when the outturn is published).
• Reform tests:
  • setting the EA to zero raises ni_employer by the modelled EA;
  • raising the EA from £3,000 to £4,000 in 2020-21 costs about £445m, with the right sign and order of magnitude (Budget 2020 Table 2.1);
  • lifting the £100,000 restriction in 2025-26 raises the EA total.
• Situation tests:
  • liability below the EA gives zero ni_employer;
  • public-authority employers get no EA;
  • domestic employers get no EA, except for care workers.
• The documentation states that the EA is an approximation.
• The policyengine-uk-data obr/ni_employer calibration has been re-checked.

Not in scope

• The under-21 and apprentice zero rates and the veterans and freeport reliefs stay in Employer NI ignores the under-21 and apprentice zero rates and the Employment Allowance #1918.
• Calendar-year windows. Model year Y means tax year Y-Y+1 (convert_to_fiscal_year_parameters). Datasets that calibrate to a calendar-year blend of OBR fiscal years have to blend the engine's rules themselves. For 2025 this matters, because the 15% rate, the £5,000 threshold and the £10,500 EA all started on 6 April 2025. That is a dataset-side issue, and this one won't fix it.
• Pay levels in calibrated datasets.

Sources:

• HMRC impact note on the 2025 employer NICs changes
• Autumn Budget 2024 policy costings
• Autumn Budget 2024
• HMRC tax relief statistics, January 2026
• HMRC non-structural tax relief statistics, December 2024
• NICs (Secondary Class 1 Contributions) Act 2025 s.3
• Claim Employment Allowance: past years
• Claim Employment Allowance: eligibility
• Eligibility for Employment Allowance: further employer guidance
• Employment Allowance increases from April 2020
• OBR: National Insurance contributions
• OBR EFO March 2026
• HMRC employer further guide to PAYE and NICs 2025-26