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5 Biggest Payroll Changes for the 2025/26 Tax Year: What Employers Need to Know

Managing payroll is never an easy task but as we approach the 2025/26 tax year there are some significant changes for employers to be mindful of that will affect how employers calculate, report, and pay employee salaries, taxes, and benefits. Whether you're a business owner, HR professional, or payroll specialist, understanding these upcoming changes is crucial to staying compliant and ensuring your payroll processes run smoothly.

Let’s explore some of the key payroll changes for the 2025/26 tax year.

1. Increased National Insurance thresholds

For the 2025/26 tax year, there will be significant changes to National Insurance (NI) thresholds that will impact staff costs, cash flows and profit margins for many small and large businesses. The government has announced a rise in the lower earnings limit, the primary threshold, and the upper earnings limit. This change means that more employees will qualify for certain benefits and protections under the NI system. 

From 6 April 2025, the NI rate will increase from 13.8% to 15% whilst the threshold for when employees start paying NI will drop from £9,100 to £5,000 per year.

What does this mean for employers?

• Ultimately this change means businesses will witness higher payroll costs affecting budgeting and likely, bottom-line figures. 
• Employers will need to update their payroll systems to reflect the new thresholds. Employees who previously did not qualify for NI deductions may now be subject to them, while some employees may see a reduction in their NI contributions.
• Payroll software will need to be updated to ensure calculations reflect these new thresholds, which may affect both employer and employee contributions. If you use Pegasus Payroll software, then rest assured this has been completed.

2. Higher income tax bands

Income tax bands will also see an increase in 2025/26, with the upper limit of the basic rate band rising. The government is gradually introducing changes to align tax bands with inflation, and these changes will have a notable impact on high earners.

What does this mean for employers?

• For payroll departments, this means ensuring that the correct tax rate is applied based on the employee's income. Those who were previously taxed at a higher rate may see a reduction in the amount of tax deducted from their salary.
• HR teams will need to update their systems and notify employees about how these changes may affect their take-home pay.

3. Changes to Statutory Sick Pay (SSP)

The government is making adjustments to Statutory Sick Pay (SSP) rules to reflect the rising cost of living. The weekly rate of SSP is set to rise for the 2025/26 tax year, and the eligibility requirements for employees to qualify for SSP may change.

What does this mean for employers?

• Payroll departments will need to be aware of the new weekly SSP rate and update their systems accordingly. Employers may also need to ensure that they are complying with any changes in eligibility, such as adjusting the minimum earnings threshold that employees must meet to qualify for SSP.
• It’s also a good time for employers to review their internal sick pay policies to ensure they are aligned with government changes and to communicate any updates to employees.

4. Introduction of the Employment Allowance Expansion

The Employment Allowance is designed to help smaller businesses cope with the payroll cost increases by which reducing the amount of National Insurance that an employer must pay. In 2025/26 more businesses will become eligible for this relief, particularly smaller employers or those with a lower total payroll liability. 

What does this mean for employers?

• At present you can only claim up to £5,000 each tax year but from 6 April you will be able to claim up to £10,500.
• Also, a critical restriction is being removed. Currently employers that have accrued secondary class 1 NI liability of more than £100,000 are unable to claim under the Employment Allowance scheme but this restriction will be removed from 6 April meaning all eligible businesses will be able to claim regardless of their class 1 NI contributions.
• Payroll software and accounting systems will need to be updated to ensure that eligible businesses are receiving the correct amount of Employment Allowance.
• Employers should also stay informed about the specific criteria for eligibility, as businesses that were previously ineligible may now benefit from this allowance.

5. Introduction of The Neonatal Care (Leave and Pay) Act

The Neonatal Care (Leave and Pay) Act is a new initiative from 6 April that will provide additional support to families whose newborn babies require intensive medical treatment at birth. The statutory requirement includes leave periods and pay provisions to ease the financial burden on families so they can focus on their baby’s care. It gives mothers, fathers, adopted and surrogate parents up to an additional 12 weeks paid leave per child on top of their usual parental leave entitlement. 

What does this mean for employers?

This change requires adjustments in the leave adjustment section of your payroll software and requires payroll calculations to accurately reflect the updated entitlements. 

Neonatal care leave is expected to benefit around 60,000 new parents per year and will be a welcomed new relief for many.

Conclusion

The payroll changes for the 2025/26 tax year represent a significant shift in how businesses manage employee pay, benefits, and taxes. 

To ensure compliance, businesses should work closely with their payroll departments, HR teams, and accountants to update their processes, software, and communication strategies. By staying informed and prepared, businesses can navigate these changes smoothly and continue to meet their obligations.

For more information about the upcoming payroll changes and discuss how Pegasus Payroll Software can help manage your payroll obligations, please contact us today.

Posted On: April 03, 2025