The UK payroll framework undergoes regular adjustments, and the 2025–2026 tax year brings several important updates that employers must prepare for. Accurate payroll processing is not only a legal obligation but also essential to maintaining employee trust, avoiding HMRC penalties, and ensuring efficient business operations.
From updated Income Tax thresholds to significant changes in National Insurance and statutory payments, staying compliant requires up-to-date knowledge and reliable payroll processes. HMRC continues to emphasise accurate Real Time Information (RTI) reporting and adherence to PAYE regulations as cornerstones of compliance.
This guide provides a clear, practical breakdown of the new 2025–2026 payroll rules, helping employers, HR teams, and payroll providers navigate their obligations with confidence.
PAYE: How the PAYE System Operates in 2025–2026
The Pay As You Earn (PAYE) system remains the central method through which HMRC collects Income Tax and National Insurance Contributions (NICs) from employees’ earnings. Employers are legally responsible for calculating the correct deductions each pay period and sending this information to HMRC using Real Time Information (RTI) submissions. RTI reporting must be completed on or before each payday, making accuracy and timely processing essential.
Why PAYE Compliance Matters
HMRC’s PAYE framework is designed to ensure that tax deductions match employees’ real-time earnings, reducing the need for end-of-year adjustments. If payroll records are incorrect or incomplete, HMRC may require evidence to demonstrate how PAYE and NIC calculations were made emphasizing the need for strong payroll record‑keeping and compliant systems.
Tax Codes and Employee Entitlement
Every employee is assigned a tax code by HMRC, which determines their personal allowance and influences how much tax is deducted through PAYE. Using an outdated or incorrect tax code can lead to significant under or overpayments, creating additional work for both the employer and employee later on. Ensuring payroll software is updated, and tax code notifications (P6/P9 notices) are actioned promptly is therefore critical.
Who Falls Under PAYE?
Most UK employees are automatically included in PAYE and do not need to submit self-assessment tax returns unless they have additional income streams, such as rental income or significant investment income. Employers must ensure all new joiners are set up correctly, with starter checklists or P45 information processed accurately.
Income Tax: Updated Thresholds and Requirements
The 2025–2026 tax year brings confirmed Income Tax thresholds that employers must incorporate into their payroll systems to ensure correct PAYE calculations. Tax codes, personal allowances, and band thresholds are central to how much tax an employee pays, and incorrect application can lead to compliance issues or later HMRC recalculations.
Updated Income Tax Bands (England, Wales & Northern Ireland)[
HMRC’s confirmed thresholds for 2025–2026 are:
Basic Rate (20%) – taxable income up to £37,700 above the personal allowance
Higher Rate (40%) – £50,271 to £125,140
Additional Rate (45%) – income above £125,140
These rates must be applied consistently across payroll to avoid under- or over-deductions.
Personal Allowance for 2025–2026
The standard personal allowance remains £12,570 per year.
This allowance is reflected in the most common tax code, 1257L, unless HMRC instructs otherwise.
Importance of Accurate Tax Codes
Tax codes determine an employee’s tax-free entitlement and are updated by HMRC to reflect factors such as benefits, adjustments, previous underpayments, or tax reliefs. Employers must action all P6 and P9 notices promptly to ensure payroll deductions remain accurate.
Using incorrect tax codes can lead to HMRC compliance queries and employee dissatisfaction due to incorrect take-home pay.
National Insurance Contributions (NICs)
National Insurance Contributions (NICs) are a key part of the UK payroll, funding the State Pension, statutory payments, and other welfare benefits. Both employees and employers must pay Class 1 NICs, which are calculated through payroll and reported to HM Revenue & Customs (HMRC) each pay period using Real Time Information (RTI).
Employee NICs
For 2025/26, Class 1 NICs for employees are based on the following thresholds:
- Primary Threshold (PT): £12,570 per year – earnings up to this amount are not subject to NICs
- Upper Earnings Limit (UEL): £50,270 per year – earnings above this limit attract the lower NIC rate
Rates for 2025/26:
- 8% on earnings between the PT (£12,570) and UEL (£50,270)
- 2% on earnings above the UEL
Example: An employee earning £60,000/year:
- £12,570 → 0% NIC
- £12,571–£50,270 → 8% NIC
- £50,271–£60,000 → 2% NIC
Employer NICs
Employers are liable for Class 1 NICs on earnings above the secondary threshold (ST) of £5,000/year. The employer rate for 2025/26 is 15%, increased from 13.8% in previous years. Employer NICs are calculated on all eligible earnings, including overtime and bonuses, and reported via RTI.
Interaction with Statutory Payments
Certain statutory payments, such as Statutory Sick Pay (SSP) or Statutory Maternity/Paternity/Adoption Pay (SMP/SPP/SAP), may influence NIC calculations:
- Employee NICs are generally payable on statutory payments
- Employer NICs are payable on statutory payments in the normal way; however, employers can recover statutory payments from HMRC (92%, or 103% for those qualifying for Small Employers’ Relief)
Payroll systems must account for these exceptions to remain compliant.
Payroll Reporting and Compliance
Employers must:
- Deduct NICs each pay period correctly
- Submit contributions to HMRC via RTI
- Maintain accurate records for HMRC inspection
Correct NIC calculation ensures compliance, avoids penalties, and protects employee entitlements.
Statutory Payments – 2025/26 Rates
Employers are legally required to provide certain statutory payments when employees qualify. These payments support employees during sickness, maternity, paternity, or adoption leave. For 2025/26, the rates are:
- Statutory Sick Pay (SSP): £118.75 per week
- Statutory Maternity Pay (SMP), Statutory Paternity Pay (SPP), and Statutory Adoption Pay (SAP): £187.18 per week or 90% of the employee’s average weekly earnings if lower
Important note for SMP & SAP (first 6 weeks)
For Statutory Maternity Pay (SMP) and Statutory Adoption Pay (SAP), the first 6 weeks must always be paid at 90% of the employee’s AWE, regardless of the flat rate.
The flat rate of £187.18 applies only to the remaining 33 weeks, provided the 90% AWE threshold is not exceeded.
Eligibility depends on minimum earnings, length of service, and qualifying conditions. Payroll systems must accurately account for statutory payments, as they can affect both employee and employer NICs.
Correct administration of statutory payments ensures compliance with HMRC rules, protects employee rights, and prevents potential fines for underpayment or reporting errors.
Workplace Pensions and Auto-Enrolment
Under the Pensions Regulator, UK employers must automatically enrol eligible employees into a workplace pension scheme. This includes:
- Deducting employee pension contributions from each pay period
- Making employer contributions in line with minimum rates
- Re-enrolling employees periodically, even if they previously opted out
Auto-enrolment requires employers to automatically enrol eligible employees into a workplace pension scheme and make regular contributions. Employees generally qualify if they are aged between 22 and State Pension age and earn more than £10,000 per year. Once enrolled, both the employer and employee must contribute to the pension.
The minimum contribution level is 8% of qualifying earnings, made up of 3% from the employer and 5% from the employee. The employee contribution typically consists of 4% of their pay and 1% in government tax relief. Contributions are calculated on qualifying earnings, which fall within the band of £6,240 to £50,270 per year.
Employers must also monitor ongoing eligibility and carry out re-enrolment approximately every three years, automatically placing eligible staff who opted out back into the pension scheme. Accurate payroll calculations are essential to ensure the correct contributions are deducted and reported, helping employers remain compliant while protecting employees’ retirement savings.
Conclusion
The 2025/26 UK payroll landscape brings important updates to Income Tax thresholds, National Insurance contributions, statutory payments, and pension obligations. Employers must ensure their payroll systems are fully aligned with these changes to remain compliant with HMRC regulations.
Accurate PAYE calculations, timely RTI submissions, correct handling of NICs, and proper administration of statutory payments and auto-enrolment pensions are essential not only to avoid penalties but also to maintain employee trust and satisfaction.
By staying up to date with the latest rates and thresholds and ensuring payroll is processed meticulously, employers can streamline operations, safeguard compliance, and provide employees with confidence that their pay and benefits are managed correctly.
