Date posted: 5th May 2026
By Adam Wingrove, Tax Manager
The combined effect of ever evolving tax rules and the phased rollout of the Employment Rights Act means that as we move into the 2026/27 tax year, businesses must think more strategically about compliance and workforce remuneration and retention.
For 2026/27, the personal allowance remains frozen at £12,570, with income tax thresholds unchanged. As a result, where companies endeavour to increase salaries as part of rewarding staff or simply to keep in line with inflation, this “fiscal drag” has the effect of pulling more employees into higher tax bands. It’s estimated that 1 in 4 individuals are expected to be paying some higher rate tax by 2030, compared with just 1 in 10 in 2010.
Alongside this, the Employment Rights Act is introducing enhanced protections around predictable working patterns, flexible working requests and day-one rights, all of which influence how remuneration structures are designed and communicated. Looking ahead to 2027/28, further reform is expected, particularly around how benefits are taxed and reported, as well as continued implementation of employment law changes.
For directors and business owners, these developments directly affect remuneration planning. The traditional ‘salary vs dividend’ approach still has a role to play, but with the 2% increase to basic and higher rate dividend tax rate introduced in April 2026, the tax efficiency benefits are narrowing, and so looking at that in isolation is no longer sufficient
Therefore, with thresholds frozen, compliance tightening and increased worker protections, particularly around unfair dismissal and contract transparency, there is a greater emphasis on building remuneration packages that combine tax efficiency with fairness, clarity and long-term employee value.
One of the most significant changes to come is the move from voluntary to mandatory payrolling of benefits in kind from April 2027, largely replacing the long standing annual P11D process. While this means that tax will be payable in real time rather than based on estimates and tax code adjustments, it also adds administrative complexity, with greater emphasis on clear and timely information being provided to employees about pay and benefits and keeping on top of changes when they happen. This means the task of keeping payrolls transparent and accurate will become inherently more difficult.
Additionally, HMRC continues to refine its approach to tax code adjustments, particularly for employment expenses and Gift Aid. Errors in these areas can impact PAYE calculations and employee take-home pay. Following the Employment Rights Act’s focus on worker understanding of pay and deductions, this reinforces the need for accurate reporting, robust systems and clear communication with employees.
Options to salary sacrifice meanwhile remain a highly effective employer-led tax solution. Pension contributions made under salary sacrifice continue to provide income tax and National Insurance savings for both employee and employer, while low-emission vehicles, particularly electric cars, also benefit from favourable benefit-in-kind rates.
It’s important that employers ensure these arrangements are structured transparently and do not conflict with minimum wage requirements or new statutory protections, but when implemented correctly, can reduce tax liabilities while supporting sustainability and employee wellbeing objectives.
Hybrid working, though an attractive option for employees in a modern workplace, continues to present both opportunities and risks. Employers must ensure that home working arrangements are treated correctly, particularly in relation to reimbursed expenses and travel.
The Employment Rights Act also strengthens employees’ rights to request flexible working from day one, meaning businesses should align their tax treatment of expenses with clearly defined and compliant working policies. The distinction between business travel and ordinary commuting remains a key compliance area and can lead to unintended tax consequences if not fully understood.
There are also several often-overlooked reliefs that can deliver easy wins. Trivial benefits and annual event allowances may provide additional value and perks to employees in a tax-efficient way and can therefore play an important role in enhancing engagement and demonstrating employer support without significantly increasing cost.
The expansion of Enterprise Management Incentive (EMI) options from April 2026 also presents an important opportunity for growth businesses. EMI schemes remain one of the most tax-efficient ways to incentivise and retain key employees through aligning their interests with long-term business success while reinforcing retention strategies.
If you would like to discuss how these changes may affect you or your business, please do not hesitate to get in touch with a member of our specialist Employment Taxes Team.
