Payroll: What the 2026/2027 tax year has in store

It’s safe to say not since the 2010’s has the payroll landscape shifted so drastically, when auto enrolment and RTI kicked off a raft of changes. These included voluntary payrolling of benefits, the employment allowance, gender pay gap reporting, and the apprenticeship levy, as well as changes to allowable salary sacrifice deductions.

Following on from the 2025 Budget, payroll updates have arguably evolved into more of a focus towards reward incentives for employees. But what exactly do employers need to be aware of?

The Labour government’s Make Work Pay initiative was set up to raise employment standards and support workers. It has began by introducing a host of changes that companies need to be aware of.

Some of these are technical; others see the formation of new government departments; and some won’t necessarily impact businesses, but it’s still wise to be aware of them. Some of the key updates are listed below:

• The introduction of the Fair Work Agency (FWA)
• The changes in statutory sick pay (SSP)
• The new Employments Rights Act 2025
• The requirement of payroll providers to register as tax agents
• The coming introduction of mandatory payrolling of benefits 
• The continued freeze of tax codes and tax free allowances
• The increases in the National Minimum Wage (NMW) and the National Living Wage (NLW)

April 2026 will see a host of sweeping changes come into force for payroll, and along with the Spring Forecast on 3 March, there could yet be one final surprise before the current tax year ends. 

Firstly, let’s look at the Fair Work Agency (FWA). This has been setup as an executive agency as part of the Department for Business and Trade. Some of the areas the FWA will be overseeing enforcement of include holiday pay, SSP and the NMW.

With new government departments and agencies comes more regulation and oversight, not just for payroll but for all employers. Ensuring you remain compliant is imperative, not just for your employees but for your reputation as a good employer.

With sick pay, there is has been an overhaul of the regulations – the largest in two decades, arguably. Out are the three statutory waiting days, the lower earnings limit (LEL) qualification and the flat rate of pay for staff on sick leave. In their place comes sick pay for day one, as well as sick pay for all employees no matter their average earnings.

From 6th April, SSP will be calculated on 80% of the employee’s average weekly earnings (AWE). Thus, if the AWE is £100, the employee will receive £80 per week SSP.

All employees who have an AWE up to £154.05 will get 80% of their average pay. Any employee with AWE over £154.05 will receive the flat rate of SSP: £123.25 per week.

Companies that don't currently pay sick pay will see the most significant impact.

The Employments Rights Act 2025 came into force following receiving royal ascent in December 2025. It has brought in a raft of employment law changes that both employers and payroll providers need to understand.

The highlights include:

• The introduction of paternity leave and unpaid parental leave becoming a “day one” right
• New protections for pregnant workers and whistleblowers
• Zero-hours contract reforms, including guaranteed hours and compensation for cancelled shifts
• Strengthened trade union rights and the repeal of previous legislation
• Fair pay agreements in adult social care
• Changes to employment tribunal time limits
• New rights to unpaid bereavement leave, including for pregnancy loss
• Mandatory seafarers’ charter and collective redundancy rules for seafarers
• The removal of the LEL for SSP
• From January 2027, protection from unfair dismissal after six months of employment, rather than two years

The 2026/27 tax year will be the final year of voluntary payrolling of benefits before mandatory payrolling goes live in April 2027. This means that if businesses are not already payrolling, but they do have benefits in kind, there will be a few weeks to register ahead of the 5 April deadline should they want to start in April 2026. Likewise, organisations have 12 months to ensure benefits are easily calculated and reportable for payroll teams.

If an organisation is not on voluntary payroll benefits, but is planning to be captured via mandatory payrolling, it’s advised to talk with experienced advisers to ensure compliance isn’t compromised. 

As reported in the 2025 Budget, income tax thresholds and NI thresholds have been frozen for the 2026/27 tax year. While this may not affect most staff on a salary regarding the 20% banding, it could certainly push more employees into the higher (40%) and even the additional rate (45%) tax bands.

Those on minimum wage following these increases will be pushed further into the tax bands than before, following the increase in the pay rates for staff. The new rates are below:

With the government’s pledge to align all minimum wage pay rates, we’ll continue to see younger age groups receiving higher increases over the next few years, compared to those 21 and over.

There are also concerns about how this will affect staff who are over 21 and in supervisory positions and now paid close to minimum wage. Whether they push hard for a pay increase on the same level remains to be seen.

Additionally, from April 2026 there is now a mandatory requirement for all tax advisers to register with HMRC. The reasoning behind this is to ensure minimum standards set by HMRC are met.

It is hoped the change will provide clients peace of mind that those who are dealing with their tax affairs (currently including payroll), are governed by the highest standards. This will not affect employers but rather payroll providers.

For businesses, these changes to payroll significantly increase the complexities they must navigate. Payroll teams whether internal or outsourced must ensure they are up to speed.

To discuss these changes further, please get in contact with S&W's experts.