Autumn Budget 2025 and Beyond | Essential Guidance for UK Employers
Following the Autumn Budget delivered on 26 November 2025, a series of significant payroll, wage, and tax reporting changes are coming into effect over the next several years. This newsletter sets out the key updates every employer needs to be aware of, covering minimum wage increases, tax threshold freezes, salary sacrifice changes, Making Tax Digital, and the move to real-time benefits reporting.
Early preparation is strongly advised.
Changes at a Glance
| Change | Effective From | Who It Affects |
|---|---|---|
| National Living Wage and NMW increases | 1 April 2026 | All employers |
| Income Tax and NIC threshold freeze extended | April 2028 to April 2031 | All employees and employers |
| MTD for Income Tax – Phase 1 (£50,000) | 6 April 2026 | Sole traders and landlords |
| Payrolling of benefits in kind (P11D reform) | 6 April 2027 | All employers providing BIKs |
| Salary sacrifice pension NIC cap (£2,000) | 6 April 2029 | Employers and employees using salary sacrifice |
1. National Living Wage and Minimum Wage Increases
Effective 1 April 2026, the following statutory minimum rates apply. Employers must review their payroll ahead of this date to ensure full compliance. The new Fair Work Agency, which took over National Minimum Wage enforcement from April 2026, carries the same powers as the previous HMRC team, with penalties of up to 200 per cent of arrears for underpayment.
| Worker Category | New Hourly Rate | Increase | Notes |
|---|---|---|---|
| National Living Wage (21+) | £12.71 | +4.1% | Main adult rate |
| Age 18 to 20 | £10.85 | +8.5% | Significant uplift; path to NLW alignment |
| Age 16 to 17 and Apprentices | £8.00 | +6.0% | Review apprentice contracts |
| Accommodation offset | £11.10 per day | +4.1% | Where applicable |
Action required
- Review all employee pay rates before April 2026 to confirm compliance across every age band.
- Ensure salary sacrifice arrangements do not inadvertently bring pay below the minimum wage.
- Budget now for the increased wage bill, particularly if you employ younger or apprentice workers.
- Check apprenticeship contracts and confirm workers are correctly classified by age band.
2. Income Tax and National Insurance Threshold Freeze
The freeze on Income Tax and National Insurance thresholds, originally scheduled to end in April 2028, has been extended by a further three years to April 2031. The personal allowance remains at £12,570 and the higher rate threshold at £50,270. The employer NIC secondary threshold also remains at £5,000.
With thresholds static but salaries continuing to rise, more employees will gradually be pulled into higher tax bands, a process commonly known as fiscal drag.
What this means in practice
- Employees may see increased tax deductions even without a change in their nominal band.
- Expect more employee queries about take-home pay and net salary calculations.
- No rate changes have been introduced. The impact is driven entirely by frozen thresholds against rising wages.
- Employers should prepare for increased payroll queries and consider proactive staff communication.
Consider issuing brief pay explanations to staff to reduce confusion and HR burden as thresholds remain static through to 2031.
3. Making Tax Digital for Income Tax
HMRC is rolling out Making Tax Digital for Income Tax from 6 April 2026. This fundamentally changes how affected individuals report their income to HMRC.
Who is affected and when
- Phase 1 – from 6 April 2026: sole traders and landlords with combined gross income above £50,000.
- Phase 2 – from 6 April 2027: threshold drops to £30,000.
- Phase 3 – from 6 April 2028: threshold drops further to £20,000.
Key deadlines
- Digital record keeping begins 6 April 2026 for those in Phase 1.
- First quarterly update deadline: 7 August 2026, covering the period 6 April to 5 July 2026.
- First Final Declaration for tax year 2026 to 2027 is due 31 January 2028, replacing the current Self Assessment return.
Soft landing in place: HMRC has confirmed that no penalty points will be issued for late quarterly updates during the 2026 to 2027 tax year. This relief does not extend to the Final Declaration or to late payment penalties.
What you need to do
- Start keeping income and expense records digitally from 6 April 2026.
- Select and onboard MTD-compatible software well ahead of the go-live date.
- Submit quarterly updates to HMRC via your chosen MTD software.
- Contact us if you are unsure whether you fall within Phase 1 or a later phase. We can advise on scope, software, and onboarding.
4. Payrolling of Benefits in Kind – P11D Reform from April 2027
From 6 April 2027, the way most benefits in kind are reported to HMRC will change permanently. Employers will be required to report taxable benefits and pay Class 1A National Insurance contributions in real time via payroll, rather than through the annual P11D and P11D(b) process.
How the new system works
Employers will calculate the full annual value of each benefit in kind, divide it by the number of pay periods in the year, and tax that proportion each pay period. The value is reported via the Full Payment Submission, the same mechanism currently used for salaries, income tax, and Class 1 NIC.
- If benefit values change during the year, the payrolled amount can be adjusted accordingly.
- P11D and P11D(b) forms will still be required for the 2025 to 2026 and 2026 to 2027 tax years.
- From 2027 to 2028 onwards, P11Ds are retained only for employer-provided accommodation and employment-related loans. Voluntary payrolling of these two benefits becomes available from April 2027, with a mandatory date to be confirmed.
- Benefits will be taxed throughout the year rather than via a one-off adjustment, improving cash flow clarity for employees.
Important note on the first year
In the 2027 to 2028 tax year, employees may feel they are being taxed twice. This is because 2026 to 2027 benefits will still be collected through the prior year tax code while current year benefits are taxed in real time. The amounts are not duplicated, but two years of benefit tax will fall within one tax year. Early employee communication is critical.
What employers should do now
- Review all current benefits in kind, including company cars, private medical, and loans, and confirm taxable values.
- Confirm your payroll software will support real-time benefits payrolling ahead of April 2027.
- Liaise with your payroll provider now to understand lead times for system configuration.
- Consider voluntary payrolling from April 2026 to test systems ahead of the mandatory date.
- Communicate the change to employees so they understand how their benefits will be taxed going forward, including the transitional double-taxation point above.
5. Salary Sacrifice Pension Changes
From 6 April 2029, the National Insurance advantage of salary sacrifice pension arrangements will be capped. Only the first £2,000 per employee per year contributed via salary sacrifice will attract the full NIC exemption. Contributions above this threshold will be treated as standard pension contributions and will be subject to both employer and employee National Insurance.
Income tax relief on pension contributions is unchanged. This measure only removes the NIC exemption on amounts above £2,000.
Illustrative impact
An employee earning £65,000 who sacrifices £5,000 into their pension via salary sacrifice currently pays no NIC on the sacrificed amount. From 2029 to 2030, NIC will be charged on £3,000 of that sacrifice. Assuming current rates, this would give rise to additional NIC of approximately £60 for the employee and £450 for the employer. HMRC estimates the measure will raise £4.7 billion in 2029 to 2030.
Employer implications
- Employer NIC savings on higher pension contributions will be reduced from April 2029.
- Payroll systems will need to be configured to track and monitor salary sacrifice against the £2,000 annual limit per employee.
- Pension and reward structures, particularly for higher earning employees and directors, may need to be reviewed.
- Directors often fund pensions through direct employer contributions rather than salary sacrifice. This remains fully NIC-exempt, which may make structuring director remuneration more important.
Although implementation is not until April 2029, early modelling and communication with your payroll provider and pension scheme is strongly recommended.
6. Employment Compliance and Payroll Scrutiny
Enforcement activity around National Minimum Wage compliance and employment rights is increasing. The Fair Work Agency, launched in April 2026, has taken over NMW enforcement from HMRC. Penalties for underpayment remain at up to 200 per cent of arrears, with public naming of non-compliant employers.
Key compliance priorities
- Maintain accurate, contemporaneous payroll records for all employees.
- Document salary sacrifice arrangements clearly, ensuring minimum wage is never breached.
- Keep employment contracts up to date, particularly where pay rates or hours have changed.
- Conduct periodic payroll audits, especially where you have variable-hours or zero-hours workers.
- Ensure all new starters are correctly onboarded through PAYE from day one.
Recommended Next Steps
Given the volume and pace of change, we recommend prioritising the following actions across the short, medium, and longer term.
Immediate: before April 2026
- Review and update all employee pay rates to reflect the new minimum wage levels.
- If you are a sole trader or landlord with qualifying income above £50,000, begin digital record keeping and select MTD-compatible software.
- Consider voluntary registration for payrolling benefits to test your systems ahead of the mandatory date.
Medium term: by April 2027
- Prepare payroll systems for real-time benefits in kind reporting.
- Review all P11D benefits and confirm taxable values.
- Communicate the P11D change to employees, including the transitional double-taxation point.
Longer term: ahead of April 2029
- Model the impact of the £2,000 salary sacrifice NIC cap on your pension and reward costs.
- Review director remuneration structures and consider whether adjustments are appropriate.
- Work with your payroll provider to ensure systems are configured for the new salary sacrifice rules.
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This newsletter is for general information purposes only and does not constitute specific tax or legal advice. Please seek professional advice based on your individual circumstances.
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