Autumn Budget 2025: Payroll and employee incentives

In a well trailed change to salary sacrifice for pension contributions, the Chancellor confirmed that a £2,000 limit will be imposed on the amount of salary sacrifice pension contributions that will benefit from relief from national insurance contributions (NIC). This change will be implemented later than expected, at the start of the 2029/30 tax year.

Summary

While contributions above the £2,000 cap will continue to attract income tax relief, from the start of the 2029/30 tax year both employees and employers will pay NIC on salary sacrifice contributions made above this limit.

Our comment

Pension salary sacrifice has long been one of the ‘protected’ salary sacrifice schemes. It appeared to only be a matter of time before this was reconsidered, due to the perception that predominantly higher earners benefit the most from its easements.

Following the changes, it is expected that a higher rate taxpayer contributing £12,000 to their pension via salary sacrifice will be £200 per year worse off and their employer £1,500 worse off, based on current NIC rates.

While the changes are still more than three years away, employers should consider commencing their preparations now to understand the potential additional employer NIC costs. The impacts this could have on total reward packages for existing employees, and how to structure pension contributions for new joiners to the business between now and April 2029, will also need to be considered.

The Autumn Budget 2025 included increases to several important statutory limits for tax-advantaged enterprise management incentive (EMI) employee share options.

Summary

From 6 April 2026 (other than for Northern Irish companies):

• The maximum market value for tax purposes of the shares in a company over which tax-advantaged EMI options can be granted will increase from £3 million to £6 million
• The limit on the value of the gross assets of a company, together with those of any subsidiaries, which can qualify for EMI options over its shares, will increase from £30 million to £120 million
• The limit on the number of full-time employees of a company and its subsidiaries that can qualify for EMI options over its shares will increase from 250 to 500
• The maximum term of an EMI option will increase from ten years from the date of grant to 15 years. It will also be possible for companies and option holders to agree to extend the terms of EMI options granted before 6 April 2026 to up to 15 years without losing EMI tax reliefs in respect of those options

Our comment

These changes will substantially expand the scope for companies with qualifying trading activities to grant EMI options, which offer the most generous tax reliefs of the UK’s four types of tax-advantaged employee share schemes. 

The changes are likely to be welcome to many companies that either cannot currently grant EMI options or have limited scope to do so under the existing restrictions.

Northern Irish companies seem to have been excluded because of the continuing relevance of EU state aid requirements (applicable to EMI options before Brexit) and the commitment to maintain an open border with the Republic of Ireland.  

From 1 April 2026, national minimum wage (NMW) and national living wage (NLW) rates will be increasing. The NLW will rise by 4.1% to £12.71 per hour. Younger employees will receive an even greater increase with the 18–20 years’ rate rising by 8.5% to £10.85 per hour.

Summary

At the Autumn Budget 2025, the Chancellor announced that the government had fully accepted the recommendations of the low pay commission resulting in a further increase to the NMW rates. This means that for pay reference periods beginning on or after 1 April 2026, the following rates should be applied by employers: 

• NLW for those aged 21 years and over: £12.71 per hour, an increase of 4.1% from the current rate of £12.21 per hour
• NMW for those aged 18-20 years: £10.85 per hour, an increase of 8.5% from the current rate of £10.00 per hour
• NMW for those aged 16 or 17 years, or individuals completing an apprenticeship that are aged under 19 years or aged 19 years or over and in the first year of their apprenticeship: £8.00 per hour, an increase of 6.0% from the current rate of £7.55 per hour
• Accommodation offset rate for those provided with accommodation by their employer: £11.10 per day, an increase of 4.1% from the current rate of £10.66 per day

Our comment

While the headline NMW increase is smaller than increases in recent years, it still represents an above-inflation increase in costs for employers already grappling with significant recent increases in employment costs.

In the space of four years, the headline NMW rate will have increased by 33.8%, up from £9.50 per hour in April 2022 to £12.71 per hour from April 2026. Following the change in rates from 1 April 2026, an employee working 40 hours per week on NMW will be entitled to an equivalent salary of £26,437, an increase of £1,040 compared to April 2025.

The NMW increases create a greater risk of inadvertent non-compliance with the NMW rules. Many entry level and graduate roles, which often come with overtime and training requirements, are now being paid at, or close to, NMW. These roles, which have historically been paid well above NMW, often do not come with stringent monitoring of working time. However, as entry level role salaries start to converge with NMW, employer processes to track all working time are increasingly becoming necessary to remain compliant.

From 6 April 2026, individuals will no longer be able to pay voluntary Class 2 national insurance contributions (NICs) for periods they are living abroad and instead will only be able to pay Class 3 NICs.

Employers will also be required to restrict the proportion of earnings excluded from pay as you earn (PAYE) through a PAYE notification to a maximum of 30% for qualifying new residents. This applies to individuals eligible for overseas workday relief under the foreign income and gains regime. 

Summary 

Changes to voluntary national insurance contributions for periods abroad from April 2026

When individuals leave the UK, and are not able to continue to pay UK NICs under a certificate of coverage or Form A1, they’ve historically opted to make voluntary NICs to cover the periods they spend abroad outside of the UK. This is so that periods spent abroad can still count as qualifying contribution years for UK state pension purposes. Under current rules, individuals require 35 qualifying contribution years in order to be eligible for the full UK state pension, and at least 10 qualifying contribution years to be eligible for a partial UK state pension. 

Previously, such individuals could pay Class 2 voluntary NICs, provided that they had either lived in the UK for 3 years in a row or paid at least 3 years of NICs prior to their departure. 

For periods from 6 April 2026 however, they will no longer be able to pay Class 2 voluntary NICs and instead will only be able to pay voluntary Class 3 NICs. To be eligible to make voluntary Class 3 NICs, individuals need to have either lived in the UK for 10 years in a row, or paid at least 10 years of NICs while in the UK. 

Restriction on proportion of earnings excluded from PAYE through a PAYE notification to 30% for qualifying new residents

From 6 April 2026, where the employer submits a PAYE notification to HMRC on behalf of a qualifying new resident to exclude a proportion of their income from the operation of PAYE, the employer will need to restrict this to a maximum of 30%.  

Since 6 April 2025, overseas workday relief (OWR) for qualifying new residents has been restricted to the lower of £300,000 or 30% of the individual’s total employment income. Currently, this financial limit is only applied when the individual files their self assessment tax return. This new measure will limit the provisional in-year relief provided to the employee for OWR, so that it more closely aligns with their final tax position.

Our comment

The changes to voluntary NICs for non-UK resident individuals will have a cost impact for those who wish to maintain their contributions due to the higher rates of Class 3 NICs (currently £17.75 per week for Class 3 NICs and £3.50 per week for Class 2 NICs). The more restrictive eligibility criteria from April 2026, may also mean that certain individuals sent to work overseas may be unable to contribute during the non-resident period. 

Employers should consider the impact of this change on their internationally mobile population, and any additional cost to their mobility programs where the employer reimburses home country voluntary social security contributions for outbound employees. 

For individuals, the increased cost of paying voluntary NICs for periods of non-residence, when considered alongside the forthcoming increases to state pension age and the fact that many individuals are expecting to work in excess of the 35 years required to qualify for a full UK state pension, means it is possible that individuals may be less inclined to make voluntary contributions for periods of non-UK residence. 

For employees who are coming to the UK and are eligible for OWR, the amendments to the PAYE rules are not unexpected. They are likely to be seen as broadly beneficial, as it will help to manage their cash flow position by aligning, as far as possible, the provisional tax relief that they receive in-year with their final tax position. There is still likely to be some complexity, due to the fact some individuals who became a UK resident prior to 6 April 2025 and are eligible for OWR because of the transitional provisions are not subject to the financial limits on OWR.  

The final report of the second independent review of the disguised remuneration loan charge, and the government’s response to it, were published alongside the Autumn Budget 2025.

The government has accepted most of the review’s recommendations for changes to the loan charge settlement process, which are broadly aimed at easing the quantum of the charge and the burden of settling it. This is particularly for affected taxpayers with limited financial resources.

Summary

The review’s accepted recommendations include: 

• Offering a new loan charge settlement opportunity
• Allowing a taxpayer to agree with HMRC a new settlement amount, suspend the excess of their original liability over the new liability and ultimately write off the suspended amount after a specified period of compliance with their agreement
• Giving taxpayers more time to pay and write off at least £5,000 of each loan charge liability up to £70,000 in total per taxpayer, and exceptionally more for those with extremely limited current resources
• Suspending late payment interest and amounts equal to scheme promoter fees paid by the taxpayer
• Not seeking to impose penalties as standard or charge inheritance tax, in connection with the loan charge
• Treating employers which settle loan charge liabilities in a similar way to individuals 

Our comment

The loan charge was enacted in Finance (No. 2) Act 2017, to impose an income tax charge on the outstanding value, (at the end of 5 April 2019) of loans made to an individual taxpayer on, or after, 19 December 2010 (originally 5 April 1999), under disguised remuneration tax avoidance schemes which were widely used.

The loan charge itself has been controversial, with various concerns being raised about matters including its retroactivity, the harsh impacts on some affected taxpayers and HMRC’s implementation of the charge.

The government now seems determined to resolve these controversies, without fully releasing all affected taxpayers from their outstanding loan charge liabilities. 

Among the other employment tax items announced were a freeze on income tax and national insurance contributions thresholds for a further three years, a pay-per-mile charge on electric and plug-in hybrid vehicles (PHEVs), a benefit in kind easement for PHEVs and clarification of the treatment of some employer-funded benefits.

Summary

The Autumn Budget 2025 included several smaller employment tax measures. A summary of the most notable is included below: 

• A freeze on income tax and NIC thresholds for a further three years, extending the freeze until April 2031
• Electric vehicle excise duty to be introduced from 6 April 2028, which will act as a pay-per-mile charge on electric vehicles (3 pence per mile) and PHEVs (1.5 pence per mile)
• A benefit in kind easement for PHEVs stemming from new emission standards introduced from 1 January 2025, which resulted in higher CO2 emissions for PHEVs. The easement will be introduced for the period through to 5 April 2028 and, where applicable, will apply retrospectively from 1 January 2025. Grandfathering arrangements are also expected to be in place beyond 5 April 2028 for those employees in possession of an eligible PHEV on or before this date, with the easement subsisting until the earlier of 5 April 2031 or the arrangement’s variation or renewal 
• An extension of the existing income tax and NIC exemption for employer-funded benefits to cover reimbursements for flu vaccinations, eye tests and homeworking equipment from 6 April 2026
• Legislation to be introduced from 6 April 2027 to ensure that all image rights payments related to an employment are treated as taxable employment income and subject to income tax and NIC withholdings, accordingly
• An increase in the van benefit charge, van fuel benefit charge and car fuel benefit charge multipliers, in line with the consumer prices index rate from 6 April 2026

Our comment

Employers should be mindful of the further freeze of income tax and NIC thresholds, as this is likely to drag more employees into higher tax bands over time. This is expected to increase costs for employers on items such as PAYE settlement agreements and other scenarios where the employer picks up the tax on behalf of the employee on a grossed-up basis. 

While it is too early to tell how the pay-per-mile charge on electric vehicles and PHEVs will impact employers, the additional costs should be borne in mind when considering fleet renewal and entering into new leases for these types of vehicles, as the pay-per-mile charges may begin to diminish some of the benefit in kind advantages for high mileage users.

We also welcome the clarification from the government on the other measures mentioned, which should help employers navigate these areas with greater certainty.