New Tax Year, New Rules: What the 2025/26 Changes Mean for Your Business

A new UK tax year began on 6 April, and for many small businesses this one has landed with a bigger bump than usual. Following last autumn's Budget, several of the changes announced by the Chancellor came into effect at the start of April, and they touch almost every employer in the country in one way or another. If you haven't yet reviewed what's changed and what it means for your payroll and cash flow, now is the time.

A New Tax Year, A New Set of Rules

Every April brings a handful of routine updates - new tax codes, updated statutory payment rates, refreshed thresholds. This year is different because the scale of change to employment costs is genuinely significant, particularly for businesses with a larger workforce or thin margins, such as those in retail, hospitality and care. Getting to grips with the detail early gives you the best chance of adjusting pricing, staffing plans or budgets before the changes start to bite.

Employer National Insurance Contributions Are Up

From 6 April 2025, the rate of employer (secondary) Class 1 National Insurance increased from 13.8% to 15%. At the same time, the threshold at which employers start paying NICs on an employee's earnings dropped sharply, from £9,100 a year to just £5,000. That combination - a higher rate applied to a much wider band of earnings - means the increase in cost is larger than the headline 1.2 percentage point rise might suggest, especially for businesses with a lot of part-time or lower-paid staff who previously fell below the old threshold.

For a business with a dozen employees on modest salaries, this change alone can add thousands of pounds a year to the payroll bill. It is worth running the numbers properly rather than estimating, because the impact varies a great deal depending on your particular mix of salaries and hours.

A Bigger Employment Allowance for Smaller Employers

There is a genuine piece of good news to offset some of this. The Employment Allowance, which lets eligible employers reduce their employer NIC bill, has more than doubled from £5,000 to £10,500 for 2025/26. Just as importantly, the previous rule that blocked any employer with an NIC bill over £100,000 in the prior year from claiming has been scrapped entirely, so more businesses can now benefit regardless of size.

If you haven't claimed the Employment Allowance before, or assumed you weren't eligible because of the old cap, it is well worth checking your position again this year. It is claimed through your payroll software and, once switched on, applies automatically until your allowance is used up for the year.

The National Living Wage Increase

Alongside the NIC changes, the National Living Wage rose to £12.21 an hour for workers aged 21 and over from April 2025, with increases also applied to the rates for younger workers and apprentices. For any business employing staff at or near the minimum thresholds, this is a direct increase in cost that compounds the effect of the NIC changes described above, since a higher wage also means higher NICs on top.

What This Means for Your Payroll Budget

Taken together, these three changes mean that the true cost of employing someone has gone up meaningfully this year, even before you consider any pay rises you might want to give on top. We are advising clients to:

• Recalculate their annual payroll budget using the new NIC rate and threshold, not last year's figures.
• Check whether they are now eligible for, or already claiming, the full Employment Allowance.
• Review pricing and service contracts to see whether increased staff costs need to be reflected in what you charge customers or clients.
• Model the effect of any planned recruitment for the rest of the year using the new, higher cost base.

Practical Steps to Take Now

If you haven't already updated your budgets and forecasts for the new tax year, that should be the first job. Most cloud accounting and payroll software will have applied the new rates automatically from your first April pay run, but it is always worth double-checking your first few payslips of the year to make sure the calculations look right, particularly if you run your own payroll in-house.

It's also a good moment to review your wider financial plan for the year. Higher employment costs might mean revisiting your pricing, looking again at overheads elsewhere in the business, or simply building a more accurate cash flow forecast so there are no surprises later in the year.

Looking Ahead

None of these changes are going away, and history suggests thresholds and rates rarely move backwards once increased. Rather than treating this as a one-off adjustment, it makes sense to build the higher cost of employment into your longer-term planning, particularly if you are budgeting for growth or additional headcount later in the year.

If you would like help understanding exactly how these changes affect your specific payroll, or want a second opinion on whether you're claiming everything you're entitled to, our team is on hand to talk it through.