December 22, 2025 Budget 2025: Key Payroll Changes Employers Need to Know
Last month, the Chancellor, Rachel Reeves, delivered her autumn budget to Parliament. We have a full summary of all the changes here.
There are a number of matters of specific interest to our payroll clients:
Minimum Wage / National Minimum Wage (NMW) / National Living Wage (NLW)
Minimum wage and living wage rates from April 2026 will be:
- National Living Wage: £12.71
- National Minimum Wage (18–20 year olds): £10.85
- National Minimum Wage (16–17 year olds): £8.00
- Apprentices: £8.00
Freeze on Tax & National Insurance (NI) Thresholds
- The key thresholds for personal tax allowance and NI will remain frozen until at least 2030/31.
- This “freeze” increases the risk that rising salaries (e.g., due to inflation or pay rises) push employees into higher tax/NI bands.
- For some lower earners/minimum-wage workers, even relatively small increases may result in them becoming liable for income tax or NI, or moving into higher marginal tax rates.
- The Plan 2 student loan repayment threshold will be maintained from 2027–28 until 2029–30.
New Rules on Salary Sacrifice Pension Contributions (From April 2029)
- From April 2029, the exemption from NI for employee pension contributions made via salary sacrifice will be capped at £2,000 per year. This means the overall cost of employing staff using large sacrifice contributions will rise (due to increased employer NI).
- Contributions above that £2,000 threshold (even if via salary sacrifice) will become subject to both employer and employee NI, just as standard pension contributions.
- Income-tax relief on pension contributions remains unaffected (subject to existing pension-tax rules), but the NI benefit is curtailed.
Elemental’s View
We expect that all employers will reconsider how their employee remuneration is structured, in particular by removing salary sacrifice and increasing employer pension contributions for all employees. Whilst this reduces the flexibility of some large salary sacrifice schemes, it should be possible to retain the tax benefits if properly managed.
This change is not included in Finance Bill 2025–2026, but we will be keenly looking out for the draft legislation (and any associated anti-avoidance legislation) and will let you know when it is released.
Overseas Workday Relief (OWR) 30% Limit from April 2026
Since 6th April 2025, OWR has been capped at the lower of £300k or 30% of an individual’s total employment income when the employee makes their own OWR claim via their tax return.
From 6th April 2026, employers applying PAYE to qualifying new resident employees eligible for Overseas Workday Relief must ensure that any income excluded from PAYE does not exceed 30% of remuneration. If the proposed exclusion surpasses this threshold, in-year relief must be capped at 30% of the employee’s income.
How We Can Help
These changes may have a significant impact on payroll planning and employee remuneration strategies. Our team can help you review your current arrangements, assess the implications, and ensure compliance while optimising benefits for your workforce.
If you have any questions or would like tailored advice, please get in touch.
