Key Updates for the 2025/2026 Tax Year

By Heather McKinlay and Jennifer Marsden-Lambert

Second Chapter is here to keep you up to date with the most important payroll updates and tax changes that will come into effect for employers for the next 2025/2026 tax year.

The payroll changes will primarily affect employers’ National Insurance Contributions (NICs), the National Minimum Wage (NMW), statutory pay rates, and other related areas.

We have a handy summary of the key updates below:

National Insurance Contributions (NICs):

Employer NIC Rate: The rate of employer's NICs will increase by 1.2 percentage points, rising from 13.8% to 15% for earnings paid on or after 6 April 2025.
Secondary Threshold: The Secondary Threshold, above which employers start paying NICs, will decrease from £9,100 to £5,000 per year, effective from 6 April 2025.
Employment Allowance: The Employment Allowance, which provides relief from employer NICs, will increase from £5,000 to £10,500. Additionally, the previous restriction that removed eligibility for employers with NICs liabilities over £100,000 in the previous tax year will be removed. All other eligibility requirements remain unchanged.

National Minimum Wage (NMW) and National Living Wage (NLW):

NLW Increase: The NLW will rise to £12.21 per hour for workers aged 21 and over, effective from 1 April 2025.
NMW Rates: The NMW rates for other age groups will also increase. For example, workers aged 18 to 20 will see the NMW rise to £10.00 per hour, and the apprentice rate will change to £7.55 per hour.

Statutory Pay Rates:

Statutory Sick Pay (SSP): The weekly rate for SSP will increase to £118.75, effective from 6 April 2025.
Parental and Other Statutory Pays: Rates for statutory maternity, paternity, adoption, shared parental, and parental bereavement pay will also see increases.

Small Employers Relief:

Small Employers Relief rate of compensation- Employers who paid less than £45,000 in Class 1 National Insurance contributions in the last full tax year will see an increase in the Small Employers Relief rate from 3% to 8.5%, effective from 6 April 2025, for eligible statutory payments. This means small employers will be able to recover 108.5% of statutory parental payments from HMRC.

Neonatal Care Leave and Pay:

The Neonatal Care (Leave and Pay) Act 2023 will come into force from 6 April 2025, though regulations still need to be put though parliament. This will give employees a new right of up to 12 weeks leave and statutory pay, when a baby they have responsibility for, is in hospital receiving neonatal care.
Neonatal leave will be available from day one of employment but statutory pay will be dependent on the employee meeting the eligibility criteria.

For further guidance and information on any of the above areas please refer to the following link.

Tax Brackets Frozen - again!

The income tax taken out of employees' pay depends on their tax code and how much they earn over their personal allowance. For the tax year 2025 to 2026, the standard personal allowance is still £12,570 for the fourth year in a row. So, employees with the tax code 1257 won’t have to pay any income tax on earnings up to that amount.

Income tax limits and allowances usually go up because of inflation based on the Consumer Prices Index (CPI). But when they stay the same, more people end up in those higher tax brackets when their pay rises. It’s worth mentioning that some income thresholds, like the £100,000 mark where the personal allowance starts to drop and the £50,000 limit that affects child benefits, haven’t been adjusted for inflation since 2010.

This is called ‘fiscal drag’ and it has been called a stealth tax by commentators. Because of this, more people are feeling the squeeze since those thresholds were set.

What the tax brackets mean for employees

A common misconception is that if you cross into a higher tax bracket, you suddenly pay that higher rate on all of your income. Thankfully, that's not how it works!

Each portion of your income is taxed at the appropriate rate only above each threshold.

UK PAYE Tax Brackets 2024/25

Here’s how your earnings are taxed:

Tax Band	Tax Rate	Income Range
Personal Allowance	0%	£0 - £12,570
Basic Rate	20%	£12,571 - £37,700
Higher Rate	40%	£37,701 - £125,140
Additional Rate	45%	£125,141+

Example: Tax on a £50,000 Salary

First £12,570 – Tax-free (Personal Allowance)

Next £25,130 (£12,571 - £37,700) – Taxed at 20% = £5,026

Next £12,299 (£37,701 - £50,000) – Taxed at 40% = £4,919.60

Total tax paid = £9,945.60

(If all £50,000 were taxed at 40%, the tax would be £20,000 - almost double! This is the mistake people often make.)

Let’s say you earn £60,000 instead:

First £12,570 – Tax-free
Next £25,130 – 20% tax = £5,026
Next £22,299 (£37,701 - £60,000) – 40% tax = £8,919.60

Total tax = £13,945.60

That extra £10,000 (£50k → £60k) doesn’t make all your income taxable at 40%, just the portion above £37,700.

The £100,000 Personal Allowance Trap

Higher earners will want to watch out for this one, particularly if they might be expecting a year-end bonus.

If you earn over £100,000, you start losing your tax-free Personal Allowance. This effectively creates a 60% tax band on earnings between £100,000 and £125,140, because you're paying 40% tax plus losing 20% of the allowance.

For every £2 earned above £100,000, you lose £1 of your allowance. At £125,140, you lose the full £12,570 allowance.

We suggest chatting with a trustworthy independent financial adviser if you’re in this situation since pension contributions can be used to offset this. Let us know if you would like an introduction to an adviser in our network.

Key Takeaways

You only pay the higher rate on the portion of income above the threshold.
Earning slightly more won’t drastically reduce your take-home pay.
The £100,000+ rule creates an effective 60% tax rate up to £125,140!

For advice and support on any of the above changes and the potential impact on your business, please do not hesitate to reach out - Second Chapter are here to support you and your employees.

By Heather McKinlay and Jennifer Marsden-Lambert

Second Chapter is here to keep you up to date with the most important payroll updates and tax changes that will come into effect for employers for the next 2025/2026 tax year.

The payroll changes will primarily affect employers’ National Insurance Contributions (NICs), the National Minimum Wage (NMW), statutory pay rates, and other related areas.

We have a handy summary of the key updates below:

National Insurance Contributions (NICs):

Employer NIC Rate: The rate of employer's NICs will increase by 1.2 percentage points, rising from 13.8% to 15% for earnings paid on or after 6 April 2025.

Secondary Threshold: The Secondary Threshold, above which employers start paying NICs, will decrease from £9,100 to £5,000 per year, effective from 6 April 2025.

National Minimum Wage (NMW) and National Living Wage (NLW):

NLW Increase: The NLW will rise to £12.21 per hour for workers aged 21 and over, effective from 1 April 2025.

NMW Rates: The NMW rates for other age groups will also increase. For example, workers aged 18 to 20 will see the NMW rise to £10.00 per hour, and the apprentice rate will change to £7.55 per hour.

Statutory Pay Rates:

Statutory Sick Pay (SSP): The weekly rate for SSP will increase to £118.75, effective from 6 April 2025.

Parental and Other Statutory Pays: Rates for statutory maternity, paternity, adoption, shared parental, and parental bereavement pay will also see increases.

Small Employers Relief:

Neonatal Care Leave and Pay:

Neonatal leave will be available from day one of employment but statutory pay will be dependent on the employee meeting the eligibility criteria.

For further guidance and information on any of the above areas please refer to the following link.

Tax Brackets Frozen - again!

This is called ‘fiscal drag’ and it has been called a stealth tax by commentators. Because of this, more people are feeling the squeeze since those thresholds were set.

What the tax brackets mean for employees

A common misconception is that if you cross into a higher tax bracket, you suddenly pay that higher rate on all of your income. Thankfully, that's not how it works!

Each portion of your income is taxed at the appropriate rate only above each threshold.

UK PAYE Tax Brackets 2024/25

Here’s how your earnings are taxed:

Tax Band

Tax Rate

Income Range

Personal Allowance

0%

£0 - £12,570

Basic Rate

20%

£12,571 - £37,700

Higher Rate

40%

£37,701 - £125,140

Additional Rate

45%

£125,141+

Example: Tax on a £50,000 Salary

First £12,570 – Tax-free (Personal Allowance)

Next £25,130 (£12,571 - £37,700) – Taxed at 20% = £5,026

Next £12,299 (£37,701 - £50,000) – Taxed at 40% = £4,919.60

Total tax paid = £9,945.60

(If all £50,000 were taxed at 40%, the tax would be £20,000 - almost double! This is the mistake people often make.)

Let’s say you earn £60,000 instead:

First £12,570 – Tax-free

Next £25,130 – 20% tax = £5,026

Next £22,299 (£37,701 - £60,000) – 40% tax = £8,919.60

Total tax = £13,945.60

That extra £10,000 (£50k → £60k) doesn’t make all your income taxable at 40%, just the portion above £37,700.

The £100,000 Personal Allowance Trap

Higher earners will want to watch out for this one, particularly if they might be expecting a year-end bonus.

If you earn over £100,000, you start losing your tax-free Personal Allowance. This effectively creates a 60% tax band on earnings between £100,000 and £125,140, because you're paying 40% tax plus losing 20% of the allowance.

For every £2 earned above £100,000, you lose £1 of your allowance. At £125,140, you lose the full £12,570 allowance.

We suggest chatting with a trustworthy independent financial adviser if you’re in this situation since pension contributions can be used to offset this. Let us know if you would like an introduction to an adviser in our network.

Key Takeaways

You only pay the higher rate on the portion of income above the threshold.

Earning slightly more won’t drastically reduce your take-home pay.

The £100,000+ rule creates an effective 60% tax rate up to £125,140!

For advice and support on any of the above changes and the potential impact on your business, please do not hesitate to reach out - Second Chapter are here to support you and your employees.

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