Employment tax hot topics

Employment tax risks are at the forefront of compliance challenges for businesses, with HMRC tightening enforcement, evolving regulations and increased scrutiny on payroll structures. As employers adapt to new and ever-changing tax policies and workforce dynamics, ensuring compliance while optimising PAYE strategies is critical. As an employer your focus is on recruiting, retaining, retraining, rewarding and redundancy.

To support you in navigating these complexities, we have listed out the current key employment tax hot topics that you, as an employer, need to be aware of.

Key employment tax hot topics

PAYE health checks

Overview

• Increased HMRC scrutiny on PAYE systems, focusing on underpayments, worker misclassification and RTI submission errors
• Common risks include incorrect tax codes, misreporting of benefits in kind and errors in calculating NICs

Key actions

• Proactive health checks help identify and rectify issues before HMRC audits
• Back to basics to ensure compliance

Mandatory payrolling of benefits in kind (BIKs)

Overview

• From April 2027, all BIKs must be payrolled, replacing the P11D system. Employers need to prepare for this transition and preparation is essential

Key actions

• Ensure you are ready for the transition – plan, communicate and review your current P11D processes
• Consider registering to voluntarily payroll benefits from April 2026 and get ahead of the game

Worker classification and IR35 compliance

Overview

• Distinguishing accurately between employees and contractors is critical
• Misclassification can lead to significant liabilities and retrospective adjustments

Key actions

• Regularly review contracts and working practices
• Ensure alignment with IR35 guidelines
• Review any non-executive directors or office holders to ensure tax treatment is correct as possible employees

National minimum wage and national living wage compliance

Overview

• Handling deductions – especially in salary sacrifice arrangements – requires careful calibration
• Incorrect application may breach NMW regulations, leading to fines and potential back-pay liabilities

Key actions

• Conduct frequent PAYE health checks
• Monitor salary sacrifice arrangements to ensure they remain NMW compliant. It is more than paying at the correct rate, you need to ensure all hours are paid for and the regulations can be complicated

Salary sacrifice arrangements and benefits in kind (BIK) valuation

Overview

• Improperly designed salary exchange schemes can offset intended tax benefits
• Accurate valuation of benefits (e.g. company cars, accommodation) is crucial

Key actions

• Periodically audit salary sacrifice and BIK arrangements
• Consult with tax specialists on proper valuation methods
• If you don’t already do pensions by salary sacrifice, then consider it for employee and employer savings

Labour supply chain and IR35

Overview

• April 2026 changes shift PAYE/NIC liability to end clients or agencies, requiring contractual reassessment
• Umbrella company risks continue, with HMRC targeting disguised remuneration schemes

Key actions

• Businesses must audit supply chains to ensure full compliance and risk mitigation

Payroll processing and real time information errors

Overview

• Accurate and timely payroll submissions (RTI, P11D, etc.) are essential
• Errors in payroll processing can result in fines and compliance issues

Key actions

• Implement regular auditing of payroll processes
• Utilise robust payroll software to minimise human error.

Termination payments and national insurance contributions liabilities

Overview

• Severance payments must be structured carefully to avoid exceeding tax-free thresholds
• Errors in classification can lead to unexpected National Insurance Contributions (NICs).

Key actions

• Regularly review and adjust termination packages
• Engage expert advisors when restructuring severance terms

Employment allowance misapplication

Overview

• Incorrect eligibility determinations or miscalculations of the allowance can impact overall payroll liability.

Key actions

• Stay up-to-date with HMRC guidelines on employment allowance
• Conduct periodic cross-checks during payroll audits

Off-payroll working (IR35) risks for contractors

Overview

• Emerging hybrid and remote work models add complexity to contractor arrangements
• Ensuring contracts meet HMRC’s off-payroll (IR35) criteria is increasingly critical

Key actions

• Reassess contractor and freelancer arrangements regularly
• Update contracts to clearly reflect the nature of the working relationship

Benefits in kind reporting and valuation challenge

Overview

• New and flexible benefits schemes present ongoing valuation challenges
• Misreporting may result in under- or over-stated taxable benefits

Key actions

• Enhance internal processes for valuing and reporting benefits
• Monitor changes in tax policy regarding emerging BIK items

Pension contributions and auto-enrolment compliance

Overview

• Integrated auto-enrolment and payroll processes mean even small errors can impact overall compliance

Key actions

• Regularly review pension contribution calculations
• Ensure payroll systems are updated with current pension thresholds and rules

Construction industry scheme (CIS) compliance

Overview

• For businesses operating in construction, adherence to CIS rules is critical to prevent errors in contractor deductions and reporting. Be careful of being a Deemed Contractor is your spending on construction operations exceeds £3m across a 12 month rolling period
• Non-compliance can result in incorrect tax deductions, penalties, and challenges during HMRC audits

Key actions

• Confirm that all subcontractors are correctly registered under CIS
• Regularly review deduction rates and submission of CIS returns
• Engage in specialist advice to interpret complex scenarios, ensuring alignment with HMRC expectations

Global mobility and cross-border payroll issues

Overview

• Remote work and international assignments introduce complexities with cross-border tax regulations
• Risks include double taxation and compliance across multiple jurisdictions
• Recent changes to residency and s690 applications

Key actions

• Develop comprehensive global mobility policies
• Collaborate with local tax experts to ensure cross-border payroll compliance

Summary and next steps

Regular audits, robust payroll systems, and continuous staff training are essential to reduce risk and avoid costly HMRC interventions.

A comprehensive PAYE health check of your systems and processes is one of the most effective ways to ensure compliance and identify issues before they become liabilities.

Contact our employer solutions team to find out how they can help.