Payroll compliance check: Preparing for wage, tax and employment law shifts in 2026
The government has announced multiple changes in Budget 2025 that will affect your company’s payroll.
An increase to both the minimum wage and the National Living Wage will come into effect from April 2026, as will the introduction of the Employment Rights Act 2025. This means that your company will need to be ready for when these changes take place.
Failure to meet the government’s legally required payroll compliance can lead to fines, back pay for affected employees, and potential tribunal claims, meaning that even a simple missed date can cost your business dearly.
It isn’t just human error that can cause compliance failures. Outdated practices and inefficient payroll procedures can also lead to problems. The payroll software your business uses must be ready to handle these changes and ensure your company always meets legal compliance requirements.
Let’s take a deeper look at the new rules for payroll compliance and what they mean for your business:
Changes to wages
From April 2026, the National Living Wage for workers aged 21 and over will rise to £12.71 per hour. The minimum wage for workers aged 18-20 will increase to £10.85, while also rising to £8.00 for workers aged 16-17.
This increase will affect a large number of employees, and all base rates must be updated in time for this change and implemented in any payroll after the introduction.
Companies that have staff with variable hours and that hire across multiple age groups will be particularly affected by this change.
It is important to note that secondary rates will also need to be updated and checked to ensure the new wage rates are being used in their calculations. If these checks are done early and both the base and secondary rates are updated, businesses can avoid accidental underpayments.
Payroll teams should take the time before the changes to understand which staff will be affected. By identifying them early, companies can prevent late implementation.
Companies should also note whether any staff are moving between age bands or if any apprentices are completing apprenticeships mid-cycle. This step will ensure that rate changes are applied correctly and minimise the chance of underpayment.
Tax and National Insurance changes
The government announced that tax thresholds would remain frozen for a further three years, until 2031. Additionally, from 2029, only the first £2,000 contributed towards salary sacrifice will receive National Insurance Contributions (NICs) relief, which means that when salary sacrifice exceeds this threshold, both the employee and the employer will need to pay NICs.
The combination of wage increases and this tax threshold freeze may cause employees to experience fiscal drag as they move into a higher tax band. Whilst these changes aren’t decided or actioned by payroll, poor or unclear communication can lead employees to blame the payroll team when their take-home pay is affected.
Companies should regularly review their payroll communication policies and procedures and ensure that any factors that could affect employees’ wages are explained. Being proactive with communication can help prevent an increased burden on the payroll team as workers experience these changes by reducing the number of questions they must answer.
Whilst the changes to Salary Sacrifice NICs won’t come into effect until 2029, companies must examine how their current payroll systems track Salary Sacrifice and ensure that there is a procedure in place to identify and properly handle employees who have exceeded this threshold.
The business is responsible for NICs, and poor payroll practices can increase the risk of underpayment and lead to non-compliance.
Sick pay changes
The Employment Rights Act 2025 means that from April 2026, Statutory Sick Pay (SSP) will be payable from day one, instead of after four consecutive days.
The Employment Rights Act will also remove the Lower Earnings Limit (LEL), which means that all employees, regardless of salary, can qualify for SSP.
These changes will affect all workers, including variable-hour employees and low-wage employees.
Due to the shortening of the SSP waiting period, payroll teams will have less time to validate absence data and respond to employees needing time off, narrowing the margin for payroll error.
The removal of the LEL also means payroll must be ready to give SSP for all employees within the company when they are absent.
Businesses should assess their current handling of absence records, their procedures for processing requests, and their communication of this information to the payroll team.
A smooth system that provides an easy way for employees to request time off, interlinked with the payroll system, allows for instant updates and logging, helps ensure the system is up to date, and ensures sick pay is processed as quickly as possible to prevent underpayment and noncompliance.
Ensuring payroll flexibility
As employment rules continue to evolve, businesses should review their payroll processes frequently.
Having a flexible payroll system that can implement new factors before payroll teams need to react helps ensure enterprises avoid noncompliance and the problems that come with it, regardless of future regulatory changes.