The Employment Allowance is a relief that lets an eligible employer reduce its secondary (employer) Class 1 National Insurance bill by up to £10,500 in 2026/27. It is set against the employer NIC charged at 15% on salaries above the £5,000 secondary threshold.
The crucial point for contractors is the single-director restriction: a company whose only employee is a single director cannot claim the Employment Allowance. This is exactly the position of the typical one-person PSC, which is why so many contractor PSCs cannot use it. A PSC that genuinely employs a second person (for example a spouse doing real work on the payroll) may be able to claim.
This restriction directly shapes the optimal salary. A single-director PSC that cannot claim the allowance typically sets salary between the £5,000 secondary threshold and the £6,708 lower earnings limit, often at £6,708 to secure a qualifying National Insurance year while accepting a small slice of employer NIC. A company that can claim the allowance can usually pay up to £12,570 with the extra employer NIC relieved. There is no single universally optimal salary; it depends on Employment Allowance eligibility, other income and the corporation tax marginal rate, so it should be modelled. The statutory hook is the National Insurance Contributions Act 2014.