PAYE updates you need to know and their impact in the 2025/26 tax year
Employer's National Insurance, off-payroll working, P11Ds, salary sacrifices... HMRC implemented some important PAYE updates this Spring that may affect you and your business. Here’s our summary of what you need to know, the impact on your payroll during the 2025/26 tax year, and what you can do to help your business.
Employer National Insurance, Employment Allowance and Small Employers’ Relief — check if changes affect your business
Changes to employer National Insurance took effect on 6 April 2025. The new threshold for National Insurance contributions (NICs) in 2025/26 is £5,000 per year, a reduction from the previous threshold of £9,100 per year.
While these changes should have been incorporated into existing payroll software for employers who already report PAYE, some employers may now be liable to pay employers’ National Insurance and required to report their employee pay and deductions to HMRC for the first time.
Contribution rate increases
The employer secondary Class 1 National Insurance contributions rate increased to 15% from 13.8%. So, the 15% charge will start on earnings above £416 per month as opposed to the previous £758.
The associated Class 1A and 1B National Insurance contributions rates on expenses and benefits given to employees also increased to 15%.
Secondary threshold for employer National Insurance liability is now lower
The secondary threshold is the point at which employers start to pay employer National Insurance contributions on an employee’s salary. This decreased from £9,100 to £5,000 per year.
Employers now need to pay employer National Insurance contributions where they employ staff earning £5,000 a year or more, and should have been reporting these payments to HMRC from 6 April 2025.
Those new to paying employer National Insurance contributions need to register for PAYE with HMRC and use payroll software.
Employment Allowance changes
To help protect smaller employers from the increase in employers’ NI contributions, the amount of the employment allowance increased from £5,000 to £10,500 per year from 6 April 2025.
Eligible employers can offset this employment allowance against their NIC liability. Previously, only employers whose total employers’ NIC was £100,000 or less in the prior tax year could claim the allowance. This change makes more employers eligible as businesses with NIC liabilities exceeding £100,000 in the previous year will now qualify.
And it opens the allowance to larger employers who were previously excluded, broadening its support beyond the smallest employers.
Most businesses or charities can apply for EA. However, they can’t do so if they’re a public body or a business whose activities wholly or mainly involve the performance of functions which are of a public nature. Whether these functions are publicly funded can indicate functions of a public nature, but funding alone is not the deciding factor.
Businesses will need to continue to consider if they’re a connected company. Because if, at the start of the tax year, two or more companies are connected with each other, only one of those companies can qualify for the EA for that tax year.
If the company has just one director and that director is the only employee liable for secondary Class 1 National Insurance contributions, they’re also ineligible.
Abolition of the £100,000 EA threshold also means that from 6 April 2025, employers no longer need to consider state aid where they had previously done so because of the threshold restriction.
Small Employers’ Relief compensation rate increased to 8.5%
The rate increased to 8.5% on 6 April 2025, as a result of aligning it with changes to employer National Insurance contributions.
Employers who qualify for Small Employers’ Relief — if they’ve paid £45,000 or less in Class 1 National Insurance contributions, can reclaim 100% of all statutory payments they pay except Statutory Sick Pay which cannot be reclaimed, plus an additional 3% compensation. This means small employers can now reclaim 108.5% from HMRC.
The compensation rate applies to:
statutory maternity
statutory paternity
statutory adoption
statutory parental bereavement
statutory neonatal care
shared parental pay
All other employers, paying Class 1 National Insurance contributions, can reclaim 92% of what they pay in these statutory payments, with the exception of statutory neonatal care pay.
Further helpful information is available on:
Employment Allowance — what you’ll get and check if you’re eligible
Employment Allowance — further guidance for employers including details on connected companies, connected charities, single-director companies, employers of care and support workers
Get financial help with statutory pay — what you can reclaim
Employer National Insurance changes were announced at Autumn Budget 2024.
Payroll amendments for female employees who pay less National Insurance
HMRC has added further guidance to help employers check the eligibility of employees who pay the married women’s and widows’ reduced rate of National Insurance, sometimes called the ‘small stamp’.
You should check your employee’s date of birth and gender and that they’re eligible to pay the reduced rate of National Insurance before you submit a payroll submission.
Following a system update, if the employee’s date of birth isn’t valid you’ll get an error message and will need to check and select another National Insurance category for them, to submit payroll.
If a female employee gives you a ‘certificate of election’ form, she may be able to pay less National Insurance. Check the details on the certificate against the updated payroll for female employees who pay less National Insurance guidance, which states married women born before 6 April 1961 could choose to pay less National Insurance until 1977, when the scheme ended.
If your employee opted in before it ended, she can keep paying a reduced rate. It also explains which National Insurance category letter you need to use for your employee’s payroll submission, with different letters for eligible employees paying the reduced rate according to their place of work.
The National Insurance rate and categories letter table also specifies only eligible employees should be given the National Insurance category letter for paying the married women’s and widows’ reduced rate.
The majority will use category B for the reduced rate. The additional categories and letters to be used where this reduced rate would apply for those eligible are:
E — if you are claiming Investment Zones National Insurance relief
I — if you are claiming Freeport National Insurance relief
T — if your employee is a mariner on a foreign-going vessel
Payroll for female employees who pay less National Insurance gives more information on what action you need to take if they want to stop. This includes changing your employees’ National Insurance category letter in your payroll software, usually to A, or as follows:
N — if you are claiming Investment Zones National Insurance relief
F — if you are claiming Freeport National Insurance relief
V — if you are claiming Veterans National Insurance Contribution relief
R — if your employee is a mariner on a foreign-going vessel
If you need to correct an employee’s National Insurance category letter, here are some tips on fixing problems with running payroll.
New National Minimum Wage and National Living Wage rates
National Minimum Wage (NMW) and National Living Wage (NLW) are the lowest rates of pay per hour that most workers must be paid by law. It doesn’t matter how many workers you employ, you must pay at least NMW or NLW.
Rates increase on 1 April each year. So employers should now be using the new rates from the first pay reference period starting after 1 April 2025.
21 and over: £12.21 per hour
18–20: £10.00 per hour
16–17 and apprentices: £7.55 per hour
Changes to company size thresholds for off-payroll working
If you’re considering the off-payroll working (OPW) rules, there’s an important change relating to company size thresholds you need to know.
On 6 April 2025, the government thresholds determining whether a company is classified as ‘small’ changed. So for accounting periods beginning on or after this date a private company or organisation will now be considered small if two out of the three following conditions are met:
turnover of not more than £15 million — increased from £10.2 million
balance sheet total of not more than £7.5 million — increased from £5.1 million
monthly average number of employees of not more than 50 — no change
A large or medium-sized client is responsible for determining the employment status of any worker supplying their services through an intermediary — usually a personal service company.
But the threshold changes will have no practical impact for OPW until 6 April 2027, at the earliest, because a company’s size is determined by reference to previous years.
Off-payroll working — student and postgraduate loan deductions
If you’re an employer of individuals who work under the off-payroll working (OPW) rules or operate payroll for employers who do, you must not deduct student or postgraduate loan repayments from the payments that go through payroll for OPW workers.
Where the OPW rules apply, the individual is classed as a deemed employee. Payments to deemed employees are identified on payrolls by selecting the off-payroll worker marker — Real Time Information data item 208. So deemed employees are responsible for making student or postgraduate loan repayments through their own Self-Assessment tax returns after the end of the tax year.
To avoid errors, employers must not make deductions for student or postgraduate loan repayments where the off-payroll worker marker has been set.
Student loans thresholds, rates and loan start notices
The new student loan plan and postgraduate loan thresholds and rates from 6 April 2025 are as follows:
plan 1: £26,065
plan 2: £28,470
plan 4: £32,745
postgraduate loan: £21,000
Deductions for:
plans 1, 2 and 4 remain at 9% for any earnings above the respective thresholds
postgraduate loan remains at 6% for any earnings above the respective threshold
HMRC’s student and postgraduate loan repayment guidance for employers has been updated with the new thresholds.
If you receive a student loan and or postgraduate loan start notice (SL1 or PGL1) from HMRC for your employee, make sure you use the correct:
loan or plan type on the start notice
start date shown on the notice
This makes sure your employee doesn’t pay any more or less than required.
If the employee’s earnings are:
below the respective student loan and postgraduate loan thresholds, you should update the employee’s payroll record to show they have a student loan and or postgraduate loan and file the start notice — you don’t need to return this to HMRC
above the respective student loan and postgraduate loan thresholds, and deductions have not been taken, HMRC will send a generic notification service prompt as a reminder — if deductions still haven’t started, they may contact you directly
Deductions should continue until HMRC notifies you to stop.
Irregular hours / Part year worker holiday pay
Under the new rules, starting with your holiday year from January 2025 means you’ll be able to return to the 12.07% method for calculating holiday entitlement for ad hoc and part-year workers, depending on what’s outlined in your employees' contracts:
Irregular hours worker – an employee’s contracted hours are mostly or completely variable, including those on casual or zero hours contracts.
Part-year worker – an employee is contracted to work part of the year, resulting in periods of at least one week during the year that they’re not required to work and will not be paid.
For example, educational establishments where teachers and teaching assistants are only required to work approximately 38 weeks of the year, due to the school holidays. They would qualify as a part-year worker if their contract reflects this.
All other employees' holiday calculations should be based on days, hours or shifts worked. ‘Normal’ rate of pay includes commission, regular overtime payments, and any payments related to length of service or professional qualifications. It doesn’t usually include bonus payments.
Reporting expenses and benefits for the tax year ending 5 April 2025
P11D and P11D(b) deadlines
For those employers who aren’t yet payrolled, the deadline for reporting P11D(b) Class 1A National Insurance contributions, P11D expenses, and benefits in kind provided in the 2024 to 2025 tax year, is 6 July 2025.
All your P11Ds and P11D(b) must be filed online and at the same time. Late submission may result in a penalty. You can file online via one of the following methods:
HMRC’s PAYE Online service is free and will allow submissions of up to 500 employees. Here are some recorded webinars on reporting expenses and benefits that may help.
If you make a mistake and need to submit an amendment
HMRC no longer accepts any paper amendments. If you make a mistake and need to correct an error, make sure you use the relevant online correction form.
If you make a mistake or send in your form late, your employees could pay the wrong amount of tax and you could end up with a penalty.
P11D(b)
You need to submit a P11D(b) form if:
You’ve submitted any P11D forms
You’ve paid any employees’ expenses or benefits through your payroll
HMRC has asked you to file a P11D(b) form, by sending you a notification to do so
Your P11D(b) form tells HMRC how much employers’ Class 1A National Insurance contributions you need to pay on all the expenses and benefits you’ve provided to your employees through your payroll, as well as any you’ve reported to HMRC on a P11D form.
Nothing to declare
If HMRC has asked you to submit a P11D(b) form and you have nothing to declare, you can tell them you don’t owe any employers’ Class 1A National Insurance contributions by completing a no return of Class 1A National Insurance contributions form.
Paying your Class 1A National Insurance contributions
There’s a specific reference number you need to include when you make your Class 1A National Insurance contributions payment. For the 2024 to 2025 tax year this is your normal Accounts Office reference plus the numbers 2513 at the end. Don’t leave a space between any of the numbers. Here’s an example of the correct format - 123PA001234562513.
If you’re paying at a bank or sending a cheque, you must use the correct payment slip, which is pre-printed with the reference in the correct format. If you don’t use the right payment slip, or if you use an incorrect reference, HMRC won’t know you’ve paid your Class 1A charge and may send payment reminders and default notices until your payment is allocated correctly. Here’s some guidance on how to pay employers Class 1 A National Insurance.
For those employers payrolling benefits in kind
If you’re payrolling benefits in kind, you may still have a Class 1A National Insurance contributions liability and will still need to submit a P11D(b) form to tell HMRC how much employer Class 1A National Insurance contributions you owe. You’ll also need to submit online P11D forms to show any benefits you paid that you did not payroll. Check this payrolling your employees benefits and expenses guidance for help.
You can payroll all benefits and expenses except:
employer provided living accommodation
interest free and low interest (beneficial) loans
Joint beneficial loans
If you provide joint beneficial loans to your employees, remember to divide the total cash equivalent figure by the number of employees on the joint beneficial loan. Use this final figure to complete the cash equivalent for each employee on their P11D before you file your returns.
If the final cash equivalent figure is nil, record this as £0.00 on the P11D before submission.
Salary Sacrifice pension
Salary sacrifice is becoming a key strategy for businesses looking to reduce costs while enhancing employee benefits. By exchanging a portion of their salary for pension contributions, employees can reduce the amount of their salary, subject to NI contributions, that also delivers significant employer savings.
Using salary sacrifice, an employee earning a gross salary of £30,000 who is contributing 8% to their pension (5% employee and 3% employer) can help their employer save £225 per year. And this can help offset a significant portion of the NI costs set to take effect in April 2025
Paying your PAYE (and VAT) bill by direct debit
HMRC are keen to encourage payments by Direct Debit as there’s less likelihood of missing a payment deadline. Payments are automatically collected from your bank account based on the information you provide in your:
Full Payment Summary and Employer Payment Summary for PAYE tax bill
VAT return
Direct Debit can be used to pay your PAYE bill or pay your VAT bill.
As always, if you’d like any help and advice on any of these changes and their potential impacts on your business, or specific guidance tailored to your circumstances, please do speak to our team.
To stay up-to-date with legislation and access specific guidance tailored to your business circumstances, speak to the team. Call on 01225 825580, email on hello@richardsonswift.co.uk or contact us using the web form.