Payroll compliance in 2026: What every UK SME employer needs to know this year
As we enter the second quarter, it’s time to freshen up on the newest UK employment and tax legislation for 2026.
After 90% of SME businesses admitted to making monthly payroll errors in 2025, getting it right this April could save your company thousands of pounds annually.
From statutory sick pay reform to the introduction of day-one rights for parental leave, here is everything your SME business needs to know to remain compliant in 2026.
Statutory sick pay reform
One of the largest items on the agenda in 2026 is statutory sick pay (SSP) reform. From April 2026, the UK government aims to widen access to SSP, making it easier for employees to claim sick pay from day one of leave.
Here’s what to expect:
- No lower earnings limit: Prior to the 6 April 2026 changes, the old Lower Earnings Limit (LEL) for SSP in the UK was £125 per week for the 2025/26 tax year. This LEL has now been removed as of the 6th April, allowing all employees to qualify for statutory sick pay regardless of their earnings.
- No period of incapacity: From April 2026, employees will be eligible for SSP from day one of sick leave, rather than from day three.
- Standard weekly rate increase: The standard weekly SSP rate has risen from £118.75 to a starting figure of £123.25 per week, up to 80% of an employee’s usual take-home pay.
- No changes to maximum entitlement: This still remains 28 days.
The UK’s SSP reform aims to benefit low-income families, part-time workers, and seasonal contract workers who are paid by the hour at minimum wage. Ensuring that all UK employees receive 80% of their earnings during short-term sick leave has been implemented to stop those who are unwell from coming to work.
In the long run, experts suggest that a drop in presenteeism could lead to a happier, healthier workforce and improved productivity.
Day-one rights for parental leave
Controversially, parental leave was historically granted after 26 weeks of continuous service for paternity leave and after 1 year of service for unpaid parental leave.
From 6th April, day-one rights for parental leave have now been made mandatory, meaning that eligibility for paternity leave is granted from day one of employment.
In fact, employees can now give notice of this upon starting a new role. This shift not only provides greater flexibility for growing families but also allows freer movement in the job market.
The notice period for paternity leave is now just 28 days, and paternity absence can now be taken in lieu after shared parental leave and pay.
Holiday pay and leave record-keeping requirements
As we enter quarter two of 2026, all UK employers are now required to retain and file records of holiday pay and leave for a minimum of six years.
Following the introduction of the newest Employment Rights Bill, retaining annual leave documentation is now an additional requirement for NMW compliance.
UK employers must take regular payroll audits of the amount of statutory leave taken, the calculation of holiday pay in lieu of holiday taken post-termination, and any relevant annual leave documentation.
These new requirements mirror the existing 6-year NMW retention standards and aim to align with the introduction of the Fair Work Agency (FWA).
The birth of the fair work agency (FWA)
From 7th April 2026, the Fair Work Agency (FWA) will take effect. With the aim of significantly transforming the enforcement of employment rights, FWA will be introduced as the newest, most powerful enforcement body for fair wage compliance in the UK.
Unlike previous approaches to minimum wage compliance, the FWA will not rely solely on the claims of unhappy employees; instead, it will proactively enter workplaces and investigate companies’ payroll practices without a prior complaint.
This new movement aims to increase payroll scrutiny, focusing on wider employment rights practices, alongside monitoring national minimum wage, SSP, holiday pay, and modern slavery concerns.
With rising expectations surrounding payroll accuracy, employers should be prepared for major structural changes in 2027.
Approaching changes as an SME employer
As we sink well into quarter two of 2026, it’s crucial that you begin preparing for these major payroll changes.
Budgeting for increased employment costs early could save your HR team headaches as the country transitions. The key here is to regularly audit your current payroll and retain as much documentation as possible in preparation for day-one SSP processing and leave record-keeping requirements.
Those who comply early have opportunities for stronger controls in the coming years and smarter payroll management in an age of tighter restrictions.