Key employment tax changes for 2026

As we move through 2026, there are a number of targeted updates to employment tax rules. Many of these updates are now in effect, while others continue  to be rolled out. These changes sit alongside headline measures introduced 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.

Payrolling benefits in kind

From April 2027, most benefits in kind will be reported through real‑time payrolling rather than annual P11Ds. HMRC has issued interim guidance to help employers prepare. Whilst the window for employers to register for voluntary payrolling has now passed, they should be aware of further changes planned for loans and living accommodation from 2027/28. This is a significant shift that will require payroll processes and systems to be reviewed in advance. The interim HMRC guidance can be found in this link.

Statutory sick pay (SSP) changes

As of 6 April 2026, statutory sick pay rules have now changed. The lower earnings limit has been removed, expanding SSP eligibility. SSP has also become payable from day one of sickness absence. Payments will now be capped at the lower of 80% of earnings or the SSP flat rate. These changes will increase the number of employees entitled to SSP and may result in more payroll queries during the transition.

Overseas workday relief – PAYE notifications

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.

From 6 April 2026, new limits apply when submitting PAYE notifications for employees claiming overseas workday relief. Employers must ensure the proportion of non‑UK workdays entered is a reasonable estimate, and does not exceed 30%. This change reduces the risk of PAYE underpayments.

National minimum wage – avoiding underpayments

National minimum wage (NMW) compliance continues to be a key HMRC focus, with recent data showing a significant rise in underpayments across all sectors. In 2025 alone, over 445,000 workers were underpaid – equivalent to more than one in five eligible employees. Underpayments often occur unintentionally, commonly due to unpaid working time (e.g. training, travel or overtime) and deductions from wages (such as for uniforms or salary sacrifice).

HMRC has increased enforcement activity, including targeted “nudge letters” to employers, and arrears must be repaid at current NMW rates, alongside potential penalties and public naming where non‑compliance is found.

Employers should regularly review pay structures, working hours and payroll processes to reduce risk. Our full article, linked here, explores the latest figures, common risk areas and practical prevention steps in more detail.

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 have 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.

Construction industry scheme (CIS) – reforms

From April 2026, CIS monthly filing requirements will apply again, including mandatory nil returns unless inactivity is reported in advance. Late filing penalties will be fully reinstated, starting at £100 per missed return and increasing over time. These measures form part of HMRC’s wider anti‑fraud strategy.

Fair Work Agency – enforcement changes from April 2026

From April 2026, the Government launched a new fair work agency (FWA), representing the biggest change to employment rights enforcement in over a decade. The agency will bring together HMRC’s national minimum wage team, the Employment Agency Standards Inspectorate and the Gangmasters and Labour Abuse Authority into a single enforcement body.

The Fair Work Agency will have wider powers to investigate breaches of workplace rights, including national minimum wage, holiday pay, statutory sick pay and agency worker protections, with fewer opportunities for employers to correct errors before penalties are applied. The aim is to strengthen compliance, reduce gaps in enforcement and improve protection for lower‑paid and vulnerable workers. For more details, please see our article linked here.

Car benefit and mileage details

• Electric vehicle (EVs), whilst still a taxable benefit, are chargeable at a much lower rate than regular vehicles. That said, the appropriate percentage for benefit-in-kind purposes is increasing from 3% in the 2025/26 tax year, to 4% in the 2026/27 year. Further increases are planned, such that the rate will be 5% in 2027/28, 7% in 2028/29 and 9% in 2029/30
• Ultra‑low emission vehicle rates (non-EVs emitting below 75g/km) are also increasing from a maximum of 20% by 1% for the 2026/27 tax year and then a further 1% in the 2028/29 tax year. Furthermore, the minimum percentage will increase significantly from 5% to 18% in the 2028/29 tax year
• For the 2026/27 UK tax year, approved mileage rates for cars remain at 45p per mile for the first 10,000 miles, and 25p per mile thereafter. Likewise, the rates for motorcycles and bicycles remain at 24p and 20p respectively, regardless of the total number of miles. However, the Chancellor, Rachel Reeves has stated that she is ‘keeping a very close interest’ on the rates, with possible rises to follow in a future budget.

Other key HMRC rates to be aware of

For the 2026/27 tax year, employers should note the following HMRC rates:

• National minimum wage increases from 1 April 2026, with above‑inflation rises across age bands –
  • Employees 21 and over – £12.71
  • Employees between 18 and 20 – £10.85
  • Employees between 16 and 17 – £8
  • The £8 rate also applies to apprentices under 19, or over 19 but in the first year of their apprenticeship.
• The official rate of interest (ORI) remains at 3.75%.

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.