Key employment tax changes for 2026

As we move into 2026, the UK government has introduced a number of targeted updates to employment tax rules. Many of these updates will come into effect this year. These changes sit alongside headline measures introduce in the 2025 Autumn Budget such as the continued freeze on income tax and national insurance thresholds. These smaller adjustments are still highly relevant for employers, especially those managing staff across international borders.

Limits to payroll restriction – Overseas workday relief

Overseas workday relief (OWR) is available to individuals who become UK tax residents whilst carrying out employment duties overseas. It allows them to exclude income earned on overseas workdays from UK taxation during a qualifying period. To qualify, the individual must be a new UK resident after being non-resident for at least 10 consecutive tax years. The relief applies for up to four tax years, starting with the year of arrival.

In April 2025, the government introduced a cap, limiting the relief available to 30% of overall income (or £300,000, if lower). It also removed the need to keep overseas earnings in offshore accounts.

What is changing?

Changes announced in the Budget have effectively aligned the PAYE relief available to this cap. Under UK tax rules, if an individual is not liable to tax in the UK on certain employment income, they are subject to PAYE on 100% of their earnings. This is unless a notification is sent to HMRC. Without this notification, the individual would need to submit a refund request at the end of the year.

This notification to HMRC is commonly referred to as a ‘Section 690’ or ‘s.690’ and can be submitted via an online form. Once submitted, it allows the employer to operate PAYE only on the earnings that are expected to be taxable in the UK. This reduces cashflow issues for employees by minimising double taxation.

There are restrictions on which employees are eligible for a s.690. One of the groups is those claiming OWR. Given the 30% cap on OWR, the government have now aligned this cap with the amount that can be adjusted via a s.690.

This means that employees claiming OWR who submit a s.690 can now only limit the restriction of PAYE to 30% of their income. This aligns with the previously introduced cap on relief.

Employees with s.690 for other cases, such as non-residents or treaty non-residents, remain unaffected by this cap.

Voluntary national insurance contributions (NICs)

Significant changes to the national insurance system introduce new conditions to be met before voluntary NICs can be made.

Paying voluntary class 2 NICs while living abroad allows individuals to maintain their UK state pension entitlement and access certain benefits. Gaps in national insurance records can reduce future pension or eligibility for payments such as jobseeker’s allowance.

Class 2 contributions are typically much cheaper than class 3, making them an attractive option for those who qualify.

What is changing?

From 6 April 2026, class 2 contributions will no longer be permitted for time spent abroad. Only the more expensive Class 3 contributions will be allowed. This increases the cost of maintaining a national insurance record from £3.50 per week to £18.40 for those impacted. The definition of ‘time spent abroad’ is still unclear, but this may refer to an individual’s tax residence status.

To make voluntary contributions, applicants must either lived in the UK consecutively for 10 years or paid UK NICs for at least 10 years.

HMRC guidance has confirmed that this will not affect voluntary NICs for time abroad before 6 April 2026.

If someone currently pays Class 2 NICs abroad, HMRC will write to them from July 2026. If they have a direct debit, HMRC will collect the final payment for the 2025 to 2026 tax year on 10 July 2026.

Changes to expenses

Previously, employers could cover certain costs (e.g. eye tests and flu vouchers) without these being subject to income tax or national insurance. However, an important criterion was that the employer had to pay for these directly, rather than reimbursing the employee. The exemption did not apply when employees purchased these items themselves and were later reimbursed.

What is changing?

From 6 April 2026, the rules will be simplified. This is to create a more consistent approach and allow for an employer to reimburse certain costs whilst benefitting from the exemption. The exemption will extend to specific reimbursed expenses, including eye tests, home working equipment, and flu vaccinations.

Separately, the Budget announced a key change as to how employees can receive tax relief for homeworking expenses. Previously, employees could claim either actual costs (with evidence) or a flat rate of £6 per week. This could either be reimbursed by their employer, tax free, or the employee could claim this as a deduction from income.

From 6 April 2026, employees can no longer claim income tax deductions for the additional household costs incurred when working from home. This will only apply if those costs are reimbursed by their employer.

This change does not affect the existing exemption for employers who reimburse homeworking expenses without deducting tax or NICs. It is only for those individuals claiming the costs against income.

How can PKF Francis Clark help?

This can be an uncertain time for employers, already facing spiralling costs. Our team of experts can provide guidance on the impact of changes and keep you up to date with the latest developments. If you would like to discuss what the measures might mean to your business, please get in touch.

For more Budget insights visit our 2025 Budget Hub.