Executive summary
Published 28 May 2025
© Crown copyright 2025
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Background
The Employment Allowance aims to reduce the barriers faced by small businesses, charities and Community Amateur Sports Clubs which wish to grow, by supporting them with the costs of employment [footnote 1]. As of April 2022, the Employment Allowance enables eligible employers to reduce their annual National Insurance contributions (NICs) liability by up to £5,000.
HM Revenue and Customs (HMRC) commissioned Ipsos to undertake a thorough and independent evaluation of the impact of the Employment Allowance, including the effect it had on employment and business growth. The evaluation comprised 3 strands of research which included a quantitative survey, econometric analysis, and qualitative in-depth interviews.
Experiences of claiming
In terms of initial awareness of the Employment Allowance, around 4 in 5 claimants (82%) had heard of the scheme, as did 9 in 10 previously eligible claimants (92%) and 4 in 5 past claimants (78%), while awareness was lowest amongst non-claimants (39%).
Participants in the qualitative research who were aware of the Employment Allowance felt that information on the scheme was easily accessible and available, especially for those in payroll, accounting, and finance. However, such information was reported to be less visible for those not regularly managing these aspects of the business. The qualitative research also highlighted participants’ positive recollection of the process of claiming the Employment Allowance, which they deemed to be simple and straightforward. This was relatively in line with the survey which found that more than half of claimants (56%) said that that the Employment Allowance had no drawbacks.
Self-reported impact
More than 4 in 5 claimants (86%) that were aware of the Employment Allowance said they absorbed the money claimed into general revenue or expenditure, rather than using it for a specific purpose (8%). The qualitative research similarly found that participants struggled to recall exactly what the saved money from the allowance had been spent on, given that they reported the amount was relatively small in comparison to turnover, and spread across the year. Receiving the Employment Allowance was also not perceived to be an easily noticeable set amount of additional cash to re-invest directly into specific aspects of their business.
When surveyed about more specific impacts on their business, around half of claimants who had heard of the Employment Allowance (48%) agreed that it had been important to the growth and development of their organisation. Claimants were more likely to say the money had helped them to retain members of staff (54% compared with 22% of previously eligible claimants and 37% of past claimants). Although most employers told us that the Employment Allowance did not impact staff permanency or hours, around half of employers who said it did have an impact reported that without the Employment Allowance they would have been unable to make staff permanent or increase hours.
Proportionality of the Employment Allowance
Prospective increases or decreases in the Employment Allowance had little bearing on changing claimants’ decisions to absorb the saved money into general revenue or expenditure. The majority of claimants said that the additional money would be absorbed into general revenue or expenditure (66% for a prospective £1,000 increase in the allowance, 56% for a £2,000 increase and 58% for a £1,000 or £2,000 decrease).
Claimants who said they would likely continue to claim the Employment Allowance in the scenario of a prospective reduction reported this was partly because they believed they would internally be able to make up for the shortfalls from a potential decrease.
Econometric analysis
The econometric analysis specifically looking at small employers with NICs liabilities close to £2,000 did not find conclusive evidence of statistically significant effects of the increase in the Employment Allowance for small employers in terms of employment, turnover, output and profit. Furthermore, the evidence on the effect of the increase in the generosity of the Employment Allowance on wage per employee were mixed, while no evidence was found of an effect on employers’ capital expenditure.
These results have limited generalisability as the model approach used is specific to comparing employers with NICs liabilities around the threshold of £2,000. A second set of analyses was undertaken examining the relationship between the changes in employer’s NICs liabilities as a share of their labour costs and the outcomes of the analysis. This provided more generalisable findings and is subsequently the stronger model.
The results did not find any economically significant effects when considering all employers claiming the Employment Allowance. However, applying the approach to a sub-set of smaller employers did find economically significant effects on a number of key outcome variables including employment, turnover, output (Gross Value Added (GVA)) and profit. The most economically significant effects were found for employers with NICs liabilities between £4,000 and £10,000, decaying to close to 0 for employers with NICs liabilities over £30,000.
Considering both sets of analysis suggested that while the overall effect of the Employment Allowance on all employers was minimal, it did have economically significant effects on smaller employers (for instance those with NICs liabilities below £20,000).
The findings implied that the increase in the generosity of the Employment Allowance encouraged employers with NICs liabilities between £2,000 and £20,000 to increase their employment levels by around 2% on average. When aggregated across the population of relevant employers across all years of analysis, it is estimated that the increase in the Employment Allowance led to the creation of around 8,700 ongoing jobs and 35,000 employment years.