The transition from one tax year to another is often challenging for those involved in processing payrolls, and 2025/26 is no exception, particularly given the changes announced in recent months by the new government. 

Given how busy the world of tax is, only some changes make the headlines. And even then we may not be given the whole story as it takes time for all the implications to become clear. In this article, I have tried to cover a selection of important payroll-related changes across a number of different areas, some well known, others less so. 

Where I refer to draft national insurance contributions (NIC) legislation, I am referring to the National Insurance Contributions (Secondary Class 1 Contributions) Bill, and where I’m referring to draft employee rights legislation, it’s the Employment Rights Bill. 

Employer NIC increases

As is well known, for paydays on and after 6 April 2025, draft NIC legislation provides that:

• the rate of secondary NIC paid by employers on an employee’s earnings above the secondary threshold will increase from 13.8% to 15%; and 
• the secondary threshold will reduce from £9,100 to £5,000 per annum.

Employers will need to consider how they deal with this increased cost (ie, do they pass it on to consumers, or absorb it into profits, etc?). It is concerning, though, to read that some employers are freezing recruitment, especially of young people and apprentices.

So, attention should be paid to any NIC exemptions that are available. For example, there are higher secondary thresholds for some categories of employee, all depending on their circumstances on payday, as shown in the table below:

Plus, don’t forget that the secondary threshold is £50,270 for employers of foreign-going mariners and deep sea fishermen where the employee is under 21 on payday or studying a recognised UK apprenticeship.

Tips

• The reduction in the secondary threshold means employers will have an obligation to send the full payment submission (FPS) for employees earning above this threshold (£96 per week/£417 per month). Previously the obligation applied where earnings were above the lower earnings limit.
• Check your payroll systems and the NI letters used. Remember that whether a higher secondary threshold can be used depends on the circumstances on payday.
• Look at other ways to mitigate the increases, for example, using a salary exchange pension scheme, although there are other considerations here.
• The most tax-efficient amounts to pay to directors of owner-managed companies will need to be reviewed in light of the changes to the employment allowance and to the secondary threshold (which, for 2025/26, is less than the lower earnings limit, potentially affecting entitlement to state benefits).

Claiming the employment allowance

The increase in the rate of secondary NIC and the cut in the secondary threshold are part of a package of measures that also makes some positive changes to the employment allowance. For 2025/26 onwards, draft NIC legislation provides that:

• the annual value of the employment allowance is increased from £5,000 to £10,500;
• the £100,000 NIC eligibility threshold is removed; and
• state aid restrictions are removed.

The £100,000 eligibility limitation has applied since 6 April 2020 and restricts the employer claiming if employer class 1 NIC exceeded this in the tax year immediately prior to the claim. So, removing this threshold is significant, as it means more employers can claim the employment allowance. 

Plus, the removal of the eligibility limitation means that state aid restrictions no longer apply. This means it will no longer be necessary to declare the business sector of operation or source the relevant state aid de minimis values (€20,000 in agriculture, €30,000 in fisheries and aquaculture, etc). That said, HMRC’s RTI specifications for 2025/26 have not removed reference to state aid restrictions on the employer payment summary (EPS). HMRC has advised software developers that employers should use the field ‘state aid rules do not apply to employer’. That aside, these changes to the employment allowance are a welcome tax simplification. 

Tips

• The draft NIC legislation only changes the value and the £100,000 restriction and therefore state aid limitations. The other limitations, such as connection, single-director companies, public sector involvement and domestic employments, remain unchanged.
• It is possible to backdate employment allowance claims for the previous four tax years. When thinking about eligibility for 2025/26, also consider if the employment allowance could have been claimed for an earlier year.
• Despite the confusion over state aid restrictions, software developers are aware of the change and products should indicate to only use the ‘state aid rules do not apply to employer’ field when making a claim for the employment allowance.

RTI validation changes

HMRC is introducing two new real time information (RTI) validation checks for 2025/26 onwards.

Firstly, if an employee is on a reduced rate NI letter, HMRC will reject the FPS if the date of birth is after 5 April 1961. See HMRC’s guidance to software developers: Changes between 2024 to 2025 and 2025 to 2026.

Secondly, and possibly of greater significance, is the addition of field 218, entitled ‘workplace postcode’, which must be populated if the employee is on a special tax site NI letter (and the employer is using either the FUST or IZUST). The December 2024 Employer Bulletin confirms this, although references the investment zones only, as does the above document for software developers. You will need to gather this postcode information and populate the field for fear of the whole FPS rejecting.

Both of these possible rejections could happen from the first FPS submitted to HMRC in tax year 2025/26.

Tips

• Regarding the date of birth point, check all your employees on NI letters B, I, E and T (for mariners). The date of birth must be a date after 5 April 1961 or the FPS will reject.
• Regarding postcodes for special tax sites, not only does the information need to be gathered, but you also need to know where to populate the system, always remembering that this is a new field. Consider where it is going to be held in your software.

Hopefully, payroll software will give you error messages before you are faced with the FPS rejecting.

Scottish diligence changes

From 6 April 2025, the Diligence against Earnings (Variation) (Scotland) Regulations 2024 [2024] SI 2024/293 affect employees with:

• current maintenance arrestments (CMA);
• conjoined arrestment orders (CAO); and/or
• earnings arrestments (EA).

The regulations amend the primary legislation which sets how much money an individual is allowed to keep before any payment can be taken from their wages to recover debts, and then sets the scale of what payments can be taken above that level. As a result, for affected employees, the protected minimum balance value has increased, and the earnings arrestment tables have been updated with new values and a new earnings threshold. It is not a case of one set of tables overwriting the set that already exists in software.

It is an employer choice as to whether to apply the new tables to existing orders or just new ones. It is not a software developer choice.

Tips

• Ask yourself as an employer or ask your clients: “Do you want the new Scottish legislation to apply to existing diligence orders or only new ones?”
• Advise your software developer of the decision. Importantly, remind them it’s an employer decision, not one that should be imposed by software functionality/limitations.
• Remember that, although Scottish diligence orders will not apply UK-wide, payroll software does apply UK-wide. Therefore, all software should have updated tables from the start of the new tax year. Check your annual updates from your provider.

Statutory sick pay

Draft employee rights legislation promises to make sweeping changes, including reforms of the statutory sick pay (SSP) system, even though SSP is not an employment right as there is no statutory right to be sick.

The key changes are as follows:

• the concept of waiting days is removed, meaning SSP is payable from day one. However, the period of incapacity for work (PIW) still needs to be formed. This is being modified from four consecutive calendar days to two consecutive working days; and
• the ‘earnings at the lower earnings limit’ criterion is being removed so that all workers will receive SSP at the flat rate or a percentage of earnings, which could mean that the percentage of average weekly earnings is equal to the flat rate but capped at its value.

The percentage value was the only part of the SSP reforms up for consultation (ie, should the percentage be 50% of average weekly earnings, 90%, 100%, etc?).

A problem with the draft legislation is that it will only apply to workers who are ordinarily resident in Great Britain. With the prospect of a UK-wide SSP regime applying differently in Northern Ireland, it is little wonder that an amendment to the Bill has been made that will extend the reforms to this part of the UK. For HR and payroll professionals who operate for the whole of the UK, this is welcome as it means one SSP system will continue to operate UK-wide.

Aside from the obvious employer cost implications, an issue that springs to mind is populating software with the days a worker is expected to work. Maybe these are already there as qualifying days – a concept that still remains.

Just as important is the effective date of the reforms given that there are two dates from when things usually come into force. Employment-related issues usually come into force in October while pay-related issues come into force at the start of a tax year. Given that the SSP reforms are included in the draft employee rights legislation, does the UK Government regard this as an employment law issue and we are looking at an October 2025 implementation date?

Tips

• Don’t forget that occupational sick pay schemes that mirror the SSP regime may need to be changed. However, it is quite possible to have an occupational sick pay scheme that varies from the statutory one and, maybe, retains the concept of waiting days. Something for HR colleagues and clients to keep on top of?

• Check your software provider is conversant with the SSP reform changes and what they expect of you to make them work in practice.

Knowledge is key

There was never a time that payroll professionals could rely on a once-annual update training course to keep them abreast of changes. Payroll is all about paying people on time, accurately and in compliance with the law. To achieve this requires knowledge that is updated constantly and accurately. So, consider where you get your information, how often you get it and judge whether it can be relied upon. ICAEW’s tax news service is a good place to start. 

Plus, importantly, we are, perhaps, too reliant on payroll software capabilities. As efficient as software may be, varying between providers, we still need to know the information ourselves to judge if the software we are using meets our ongoing needs. 

Let’s not even talk about the mandation of payrolling benefits and expenses in this article, though it’s something else that should be keeping you awake at night. And if it does, that may be a good time to listen to ICAEW’s recent podcast on the subject!

Ian Holloway, Payroll and Reward Consultant. 

For further information see ICAEW’s employment taxes hub.