What are UK Payroll Laws and Legislation in 2026?

Last verified: June 2026, using GOV.UK, HMRC, The Pensions Regulator, ACAS and UK Parliament sources.

Payroll laws and legislation in the UK for 2026-27 feature major changes associated with PAYE tax rules, National Insurance contributions (NICs), Real Time Information (RTI) reporting, workplace pension obligations, statutory payments, and National Minimum Wage regulations. Employers in the UK must also meet payroll reporting deadlines, maintain accurate employee payroll records, apply correct tax codes, and comply with legislations such as the Employment Rights Act 1996, Pensions Act 2008, and IR35 off-payroll working rules.

This guide explains the key payroll compliance rules affecting UK SMEs in 2026, including HMRC reporting obligations, Employment Rights Bill changes, and employer payroll responsibilities, helping businesses reduce compliance risk and avoid costly payroll penalties.

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What Is PAYE and How Does It Work in the UK?

PAYE (Pay As You Earn) is the payroll tax system of UK that employers use to deduct Income Tax and National Insurance contributions (NICs) from employee wages before the wages are paid. Employers must register with HMRC, obtain a PAYE reference number, and report payroll information through Real Time Information (RTI) submissions such as Full Payment Submissions (FPS) and Employer Payment Summaries (EPS).

How PAYE Works

The PAYE process involves payroll reporting responsibilities for both employers and HMRC:

• Employer PAYE Registration: Businesses must register with HMRC before the first payday to receive a PAYE reference number and Accounts Office reference.
• Employee Tax Codes: HMRC issues tax codes such as 1257L, BR, D0, or W1/M1, which determine how much Income Tax should be deducted from employee earnings.
• Payroll Deductions: Each pay cycle, employers calculate gross pay, deduct Income Tax, employee National Insurance contributions, pension contributions, and other statutory deductions.
• RTI Reporting: Employers must submit a Full Payment Submission (FPS) to HMRC on or before each payday, reporting employee pay, deductions, tax codes, and NICs.
• HMRC Payments and Records: Employers must pay PAYE liabilities to HMRC by the required deadline and maintain payroll records including P45, P60, P11D, and statutory payment documentation.

What are the Current National Minimum and Living Wage Rates in UK?

From 1 April 2026, UK employers must pay at least £12.71 per hour to workers aged 21 and over. Payroll teams should also check overtime, deductions, salary sacrifice, and unpaid working time because these can accidentally pull pay below the legal minimum.

UK employers must legally pay workers at least the National Minimum Wage (NMW) or National Living Wage (NLW) rates set by HMRC. Failure to pay the correct wage can result in HMRC investigations, financial penalties, repayment orders, and public naming for non-compliance.

Employment Rights Act 1996: Key Employer Obligations

The Employment Rights Act 1996 forms the foundation of UK employment law and directly affects payroll compliance for employers. The legislation sets out key employee rights relating to wages, holiday pay, statutory leave, dismissal protections, payslips, notice periods, and working conditions. Employers must ensure payroll processes align with these legal obligations to avoid disputes, employment tribunal claims, and HMRC scrutiny.

Key Payroll Obligations Under the Employment Rights Act

To ensure compliance with the ERA 1996, employers must meet the following key legal obligations:

• Itemised Payslips: Employees and workers must receive itemised payslips
• Holiday Pay Compliance: Payroll teams must correctly calculate holiday pay
• Statutory Payments: Employers must administer statutory payments correctly, including:
  • Statutory Sick Pay (SSP): £123.25 per week
  • Statutory Maternity Pay (SMP): £194.32 per week or 90% of Average Weekly Earnings (AWE)
  • Statutory Paternity Pay (SPP): £194.32 a week or 90% of Average Weekly Earnings (AWE)
  • Statutory Adoption Pay (SAP): £194.32 a week or 90% of Average Weekly Earnings (AWE)
• Minimum Notice and Final Pay: Employers must provide correct notice pay, final salary payments, unused holiday pay, and P45 documentation

What are Your Auto-Enrolment Duties Under the Pensions Act 2008 and the 2026 Thresholds?

Under the Pensions Act 2008, UK employers must automatically enrol eligible employees into a qualifying workplace pension scheme and make minimum pension contributions. Auto-enrolment is a legal payroll obligation enforced by The Pensions Regulator, and non-compliance can result in fines and enforcement action.

Auto-Enrolment Thresholds (2026)

What are the Income Tax Bands and NI Contributions for Payroll in 2026?

For the 2026/27 tax year, the Income Tax Personal Allowance remains frozen at £12,570 until April 2028. Standard employee tax codes such as 1257L, BR, D0, and W1/M1 continue to determine how much tax is deducted from employee earnings.

UK employers are responsible for deducting Income Tax and National Insurance contributions (NICs) through PAYE and reporting those deductions to HMRC using Real Time Information (RTI). Payroll teams must apply the correct tax codes, National Insurance categories, and contribution thresholds to ensure employees are taxed accurately and employer liabilities are calculated correctly.

UK Income Tax Bands (England, Wales, and Northern Ireland)

The table below outlines the current tax rates applicable within each tax band, based on a standard Personal Allowance of £12,570.

Employer National Insurance (NI) Changes

Employee and employer National Insurance (NI) contributions vary according to income thresholds. Current rates are:

• Employer Class 1 National Insurance contributions are 15%
• The secondary NI threshold is £5,000 per year
• Employment Allowance is £10,500 for eligible businesses

What Are UK Employer Obligations for IR35 and Off-Payroll Working in 2026?

IR35, also known as the Off-Payroll Working Rules, is designed to prevent disguised employment through personal service companies (PSCs). Under IR35 legislation, medium and large UK businesses hiring contractors are responsible for determining whether a contractor should be treated as an employee for tax purposes.

If a contractor is considered “inside IR35,” the employer or fee-payer must deduct Income Tax and National Insurance contributions (NICs) through PAYE before payment. If the engagement is “outside IR35,” the contractor remains responsible for their own tax obligations.

Employer Responsibilities Under IR35

If your business exceeds the small company thresholds, you are required to comply with the following mandatory processes:

UK employers must:

• Assess contractor employment status before engagement
• Issue a Status Determination Statement (SDS) explaining the IR35 decision
• Apply PAYE deductions for inside IR35 contractors
• Maintain evidence supporting employment status decisions
• Ensure contracts reflect actual working arrangements

How Does the Employment Rights Act 2025 Impact Payroll for UK Employers?

The Employment Rights Act 2025 is being phased in across 2026 and 2027. For payroll teams, the key April 2026 changes include SSP from day one, removal of the SSP lower earnings threshold, day-one paternity leave and unpaid parental leave, stronger collective redundancy protections, and new holiday pay record-keeping duties. Other reforms, including guaranteed hours and short-notice payment rules, are scheduled for 2027, so employers should prepare but avoid presenting them as already active.

Key Payroll Changes Employers Should Prepare For

• Day-One Employment Rights
• Statutory Sick Pay (SSP) Reform
• Predictable Working Pattern Requests
• Zero-Hours Contract Protections
• Greater Payroll Transparency

What is RTI Reporting?

Real Time Information (RTI) is HMRC’s mandatory payroll reporting system that requires employers to submit payroll information every time employees are paid. Under RTI rules, UK employers must report employee earnings, PAYE deductions, National Insurance contributions (NICs), pension contributions, and statutory payments through payroll software connected to HMRC systems.

The two main RTI reports are the Full Payment Submission (FPS) and the Employer Payment Summary (EPS).

What Is a Full Payment Submission (FPS)?

A Full Payment Submission (FPS) is the main RTI report employers send to HMRC on or before each payday. The FPS contains payroll data including:

• Employee pay and deductions
• PAYE Income Tax calculations
• Employee and employer NICs
• Tax codes and starter information
• Statutory payments such as SSP and SMP
• Pension contribution data

What Is an Employer Payment Summary (EPS)?

An Employer Payment Summary (EPS) is used when employers need to adjust PAYE liabilities or report values. Employers may submit an EPS to:

• Claim Employment Allowance
• Recover statutory payments
• Report apprenticeship levy adjustments
• Notify HMRC of no employee payments in a tax month

What are the 7 Steps Every UK Employer Must Take Before Hiring Staff?

Before hiring staff in the UK, employers must complete key HMRC, payroll, pension, and compliance setup steps to stay legally compliant from day one. These seven requirements help businesses avoid PAYE penalties, RTI reporting errors, and workplace pension issues before the first payroll run.

1. Register Your Business

Before hiring staff, you must complete payroll registration requirements to obtain a PAYE reference number and access the PAYE online portal for RTI submissions, payroll tax reporting, and employer compliance management.

2. Set Up RTI-Compliant Payroll Software

Employers need payroll software that can submit FPS and EPS reports to HMRC under Real Time Information (RTI) rules.

3. Complete Employee Right to Work Checks

Before someone starts work, employers must complete right-to-work checks. This is not a payroll calculation, but it should sit inside the same onboarding checklist.

4. Collect Employee Payroll and Tax Information

Before processing payroll, employers must collect employee P45 details, National Insurance numbers, tax codes such as 1257L or BR, bank details, and starter information required for PAYE and NIC calculations.

5. Prepare for Workplace Pension Auto-Enrolment

Under the Pensions Act 2008 auto-enrolment UK employer rules, businesses must assess pension eligibility, enrol qualifying employees, and manage workplace pension deductions through payroll systems from the first pay cycle.

6. Understand Employer NI Costs

UK employer payroll obligations now include a 15% employer NI Class 1 rate and reduced secondary threshold, increasing payroll costs for SMEs managing employee wages and National Insurance contributions (NICs).

7. Build a Payroll Compliance

Before hiring, employers should set up a payroll checklist covering RTI deadlines, statutory pay, pension duties, P60s, PAYE payments, and record keeping.

Strengthen Your Payroll Operations with Expert Guidance

Need stress-free payroll compliance? Work with payroll specialists who handle it every month. Staying on top of PAYE, RTI submissions, employer NI changes, pensions, holiday pay rules, and shifting payroll legislation can overwhelm even experienced teams, and small mistakes can quickly become HMRC penalties.

At Whiz Consulting, we help UK businesses build reliable payroll compliance workflows. From PAYE calculations and RTI filing to statutory payments, tax code updates, NI contributions, auto-enrolment, and year-end reporting, our outsourced payroll services keep your processes accurate, compliant, and penalty-free, without your team spending hours fixing errors manually.