New Rules, New Risks: UK Payroll Compliance Employers Can’t Ignore

Last month went down in history as the month UK employment law changed forever with some of the biggest changes in decades. Multiple major reforms have just taken effect, creating what many experts are calling the most significant transformation in payroll compliance requirements in over 30 years.

If you’re running payroll in the UK right now, you’re managing more legislative changes simultaneously than any payroll professional has faced in recent memory. From the launch of the Fair Work Agency to sweeping SSP reforms, from mandatory record-keeping to new parental leave rights – every aspect of payroll administration has been impacted.

Here’s everything you need to know about the headlines currently reshaping UK payroll , and what you must do right now to stay compliant.

BREAKING: Fair Work Agency Launches with Unprecedented Powers

April 7, 2026 marked the official launch of the Fair Work Agency, the UK’s most powerful employment rights enforcement body ever created. This isn’t hyperbole – the agency has been granted powers that go far beyond anything previous enforcement bodies possessed.

What Makes This Different

The Fair Work Agency consolidated three separate enforcement organizations – HMRC’s National Minimum Wage team, the Gangmasters and Labour Abuse Authority, and the Employment Agency Standards Inspectorate – into one unified watchdog. But this wasn’t just administrative restructuring. The new agency received:

• Authority to conduct unannounced workplace inspections without warning
• Power to demand employment records going back six years
• Ability to interview workers and employers as part of investigations
• Jurisdiction to examine entire supply chains for violations
• Right to bring Employment Tribunal claims on behalf of workers

That final point is revolutionary. Workers no longer need to pursue claims individually. If employees are unable or unwilling to fight their own cases, the Fair Work Agency can initiate tribunal proceedings on their behalf.

The Financial Reality

The penalty structure is designed to genuinely hurt. Employers caught underpaying workers face:

• 200% penalties on top of arrears owed
• Up to £20,000 maximum fine per worker
• Six-year lookback period for retrospective claims
• 28-day deadline to respond to notices of underpayment
• Recovery of enforcement costs from non-compliant employers
• Criminal prosecution for serious or deliberate violations

Consider this real-world scenario: An employer who underpaid 10 workers by £5,000 each over several years faces £50,000 in arrears plus £100,000 in penalties – a total liability of £150,000, plus enforcement costs.

Why This Matters Now

The scale of the problem is staggering. Research shows approximately 900,000 UK workers have their holiday pay withheld annually, representing around £2.1 billion in unpaid wages. The Fair Work Agency was created specifically to tackle this systemic issue.

Expect significantly increased enforcement activity. The agency represents substantial investment in inspection capacity, meaning more frequent workplace visits, investigations, and enforcement actions across all sectors.

Employer Action Required:

• Conduct immediate compliance audits covering National Minimum Wage, SSP, and holiday pay
• Ensure employment records for the past six years are complete and accessible
• Review supply chain partners to confirm their compliance
• Implement transparent pay practices and clear communication channels

Statutory Sick Pay Revolution: Day-One Rights Begin

As of April 6, Statutory Sick Pay became a day-one employment right, fundamentally changing how businesses handle sickness absence.

Three Major Changes

1. Lower Earnings Limit Abolished
   The minimum earnings threshold that previously excluded many workers has been completely removed. Part-time workers, new starters, and lower-paid employees who never qualified before are now entitled to SSP from their first day of employment.
2. Waiting Days Eliminated
   The three waiting days before SSP became payable are gone. Employees now receive SSP from the first full day of sickness absence.
3. New Calculation Method
   SSP is now calculated as 80% of Average Weekly Earnings OR the statutory rate (£123.25), whichever is lower. This creates more generous payments for lower earners while capping higher earners at the statutory amount.

The Transition Challenge

Here’s what’s complicating payroll right now: absences that started before April 6, 2026 continue under old SSP rules, while those beginning on or after April 6 follow the new system. Payroll teams are managing both calculation methods simultaneously during this transition period.

Some employees previously excluded due to the Lower Earnings Limit may now qualify under transitional provisions, adding another layer of complexity.

Cost Implications

The reforms significantly expand SSP eligibility and increase payment amounts for many workers. Businesses with large numbers of part-time or lower-paid staff should expect notable cost increases. The maximum 28-week entitlement period remains unchanged, but more workers will reach this limit.

Employer Action Required:

• Verify payroll systems can handle the 80% AWE vs. flat-rate calculation
• Remove waiting day logic from absence management processes
• Eliminate Lower Earnings Limit checks from SSP eligibility calculations
• Update sickness absence policies and manager guidance
• Communicate changes clearly to all employees
• Test SSP calculations thoroughly with various scenarios

Holiday Pay Record-Keeping: New Legal Obligations

Effective April 6, 2026, employers face new legal duties around holiday pay record-keeping that carry serious compliance implications.

 

 

What the Law Now Requires

Employers must maintain records demonstrating compliance with holiday entitlement and pay rules. These records must:

• Be retained for six years
• Be kept in any format the employer reasonably considers appropriate
• Be systematic, accurate, and capable of withstanding scrutiny
• Show workers received full statutory entitlement and correct holiday pay

What You Must Document

Your records must evidence:

Statutory Annual Leave (5.6 weeks):

• How entitlement builds throughout the leave year
• What leave has been taken and what remains
• Clear distinction between ordinary and additional leave

Carried-Over Leave:

• Amount carried forward and the specific reason (sickness, family leave, contractual arrangement)
• Supporting evidence and internal approvals
• Particularly important for payments in lieu on termination

Holiday Pay Calculations:

• Which pay elements were included or excluded
• Reference periods used for variable pay workers
• How final figures were calculated
• Special documentation for overtime, bonuses, and commission

Payments in Lieu:

• Leave balance at point of termination
• Type of leave being paid (current year, carried over, accrued)
• Calculation methodology used
• Final payslips and holiday balance statements

 

Why This Is Critical

The Fair Work Agency’s six-year lookback period for holiday pay enforcement means inadequate records could expose you to substantial retrospective liability. Given the £2.1 billion annual gap in unpaid holiday pay, this is a major enforcement priority.

The challenge isn’t necessarily creating new information – many employers already hold some of this data. What’s changed is the legal requirement to maintain it systematically and make it audit-ready.

Employer Action Required:

• Audit current record-keeping systems for compliance capability
• Assess whether information is consistently stored and easily retrievable
• Implement processes for documenting carry-forward approvals
• Create templates for holiday pay calculation evidence
• Establish retention protocols ensuring six-year accessibility
• Train payroll and HR teams on documentation requirements

Parental Leave: Day-One Rights Expand

From April 6, 2026, significant expansions to parental leave entitlements create new day-one rights that payroll must administer.

Unpaid Parental Leave

Now available from the first day of employment (previously required one year’s service). Entitlement remains:

• Up to 18 weeks per child
• Available until child reaches age 18
• Maximum 4 weeks per year, typically taken in one-week blocks

Paternity Leave

Becomes a day-one right with important transitional notice provisions:

For babies due April 6 – July 25, 2026:

• Only 28 days’ notice required (instead of standard 15 weeks)

For babies due from July 26, 2026 onwards:

• Standard 15-week notice period applies

New flexibility:

• Second parent can take paternity leave during or after Shared Parental Leave
• Must be completed before week 52 post-birth

Bereaved Partner’s Paternity Leave (NEW)

A completely new entitlement introduced as interim protection until full Employment Rights Act bereavement reforms arrive:

Eligibility:

• Day-one employment right (no service requirement)
• Applies where primary carer dies on or after April 6, 2026
• Bereaved partner must have main responsibility for child care

Entitlement:

• Up to 52 weeks of unpaid leave
• Must be taken within 52 weeks of birth/placement
• Employers may offer pay at discretion (not statutory requirement)

Employer Action Required:

• Update HR systems to reflect day-one parental leave eligibility
• Remove service requirement checks for unpaid parental and paternity leave
• Implement transitional notice period tracking for paternity leave
• Create processes for administering Bereaved Partner’s Paternity Leave
• Train managers on new entitlements and sensitivity around bereavement leave
• Communicate changes to employees planning families

P11D Reporting: Critical Deadlines Approaching

For the 2025-26 tax year, key P11D deadlines are now imminent:

Date	Requirement
July 6, 2026	Submit P11D and P11D(b) forms to HMRC
July 6, 2026	Provide employees with P11D copies
July 19, 2026	Pay Class 1A NI (by post)
July 22, 2026	Pay Class 1A NI (electronically)

Common Errors to Avoid

HMRC regularly highlights these mistakes:

• Incorrect car benefit information
• Beneficial loan calculation errors
• Improper amendment submissions (must be electronic, not paper)

Missing these deadlines triggers HMRC penalties and interest charges. All submissions must be made online – paper forms are no longer accepted.

Employer Action Required:

• Begin P11D preparation immediately
• Verify all benefit values are accurate and complete
• Ensure P11D(b) is prepared if providing benefits or Class 1A NI is due
• Submit electronically before July 6 deadline
• Arrange Class 1A NI payment to meet July deadlines

Benefits in Kind Payrolling: Final Call for Voluntary Registration

April 5, 2026 was the deadline for voluntary registration to payroll benefits in kind for the 2026-27 tax year. The existing online registration service closed on April 6, 2026 as HMRC prepares for mandatory payrolling.

Mandatory Payrolling Coming April 2027

From April 2027, most benefits in kind must be taxed through payroll:

Included in mandatory payrolling:

• Company cars
• Medical insurance
• Gym memberships
• Most other benefits

Exceptions (remaining on P11D initially):

• Beneficial loans
• Employer-provided accommodation

A new registration service for the mandatory regime will launch later in the 2026-27 tax year.

If You Missed the Deadline

Employers who didn’t register by April 5, 2026 must continue using P11D reporting for 2026-27. However, use this year to prepare for mandatory payrolling:

• Assess whether your payroll system can handle benefits through payroll
• Review current benefit reporting processes
• Identify system upgrades needed before April 2027
• Consider early transition to build team familiarity

Employer Action Required:

• If registered: Ensure benefits are correctly included in payroll from April 6, 2026
• If not registered: Begin preparing systems and processes for April 2027 mandatory requirement
• Monitor HMRC guidance for new registration service launch
• Plan system upgrades and staff training for mandatory transition

Student Loan Plan 5: New Repayment Plan Begins

From April 6, 2026, a new Student Loan repayment plan affects payroll deductions.

Plan 5 Details

• Applies to students who started undergraduate courses in England from September 2023
• Annual repayment threshold: £25,000
• Repayment rate: 9% of earnings above threshold

All Plan Thresholds for 2026-27

Plan	Annual Threshold	Repayment Rate
Plan 1	£26,900	9%
Plan 2	£29,385	9%
Plan 4	£33,795	9%
Plan 5	£25,000	9%
Postgraduate	£21,000	6%

Critical Default Plan Change

The default student loan plan changed from Plan 1 to Plan 5 on April 6, 2026.

When an employee indicates they have a student loan but you haven’t received a Starter Checklist or Student Loan Start Notice confirming the correct plan, use Plan 5 as the default deduction plan.

Update the employee record when HMRC sends a Start Notice confirming the actual plan type.

Employer Action Required:

• Update payroll systems to recognize Plan 5
• Configure £25,000 threshold and 9% deduction rate
• Change default plan setting from Plan 1 to Plan 5
• Train payroll teams on new default plan procedures
• Watch for HMRC Start Notices from March 2026 onwards

Veterans NI Relief Extended to 2028

Good news for employers hiring veterans: the National Insurance relief for employing veterans has been extended for two additional years, now running until April 5, 2028.

How the Relief Works

• Employers pay zero Class 1 NI contributions on veteran earnings during first year of civilian employment
• Applies to earnings up to £50,270 annually (veterans upper secondary threshold)
• After 12-month qualifying period, standard employer NICs apply

Payroll Requirements

• Assign correct veterans NIC category during qualifying period
• Maintain accurate records of veteran status
• Track start date of first civilian employment post-service
• Note end date of 12-month relief period
• Update to standard NI category after qualifying period ends

Employer Action Required:

• Ensure payroll systems can apply veterans NIC category
• Create tracking process for 12-month qualifying periods
• Train recruitment and payroll teams on veteran relief eligibility
• Maintain documentation supporting veteran status and relief application

Your Comprehensive Action Plan: What to Do Right Now

The convergence of these changes creates unprecedented complexity. Here’s your prioritized roadmap:

Immediate Actions (This Week)

1. Emergency Compliance Audit

• SSP calculations and eligibility (day-one rights, no Lower Earnings Limit, no waiting days)
• Holiday pay records (six-year retention, calculation documentation)
• National Minimum Wage compliance (Fair Work Agency priority)
• Parental leave entitlements (day-one rights)

2. System Verification

• Confirm SSP calculates 80% AWE vs. flat rate correctly
• Verify Student Loan Plan 5 is configured with correct threshold
• Check default student loan plan changed to Plan 5
• Test veterans NIC category application

3. P11D Preparation

• Begin compiling benefit information for 2025-26 tax year
• Schedule P11D completion well before July 6 deadline
• Arrange Class 1A NI payment before July 22 deadline

This Month (April 2026)

1. Record-Keeping Overhaul

• Implement six-year retention system for holiday pay records
• Create documentation templates for carry-forward approvals
• Establish audit trails for holiday pay calculations
• Build processes for payment in lieu documentation

2. Policy Updates

• Revise sickness absence policies reflecting SSP changes
• Update parental leave policies for day-one rights
• Refresh holiday pay policies with record-keeping requirements
• Communicate all policy changes clearly to employees

3. Training Rollout

• Train payroll teams on all April 2026 changes
• Educate line managers on new SSP, parental leave, and holiday entitlements
• Brief HR teams on Fair Work Agency enforcement implications
• Provide employees with clear information about enhanced rights

Next Three Months (May-July 2026)

1. Supply Chain Review

• Audit recruitment agencies and umbrella companies for compliance
• Verify intermediaries meet SSP day-one obligations
• Assess supply chain partners’ Fair Work Agency exposure
• Address any gaps in partner compliance

2. Continuous Monitoring

• Track SSP costs under new rules
• Monitor holiday pay calculation accuracy
• Review Fair Work Agency enforcement activity and guidance
• Stay updated on HMRC clarifications and technical guidance

3. Prepare for 2027

• Begin planning for mandatory Benefits in Kind payrolling (April 2027)
• Assess payroll system capability for benefit taxation
• Budget for potential system upgrades
• Consider early voluntary adoption to build familiarity

Ongoing Vigilance

Fair Work Agency Preparedness:

• Maintain immaculate employment records (six years minimum)
• Conduct regular self-audits before agency visits
• Build transparency into all employment relationships
• Document everything related to pay, leave, and statutory entitlements

System Excellence:

• Implement automated compliance checks
• Create alerts for potential violations
• Build comprehensive audit trails
• Test calculations regularly with various scenarios

Communication Culture:

• Provide detailed, clear payslips
• Explain pay calculations openly
• Establish accessible channels for worker concerns
• Address questions promptly and thoroughly

The Bottom Line: This Is Your New Reality

April 2026 represents a fundamental shift in UK employment law compliance. The combination of the Fair Work Agency’s unprecedented enforcement powers, expanded statutory rights, and mandatory record-keeping creates a compliance environment unlike anything we’ve seen before.

The stakes have never been higher:

• Penalties of 200% plus £20,000 per worker
• Six-year lookback periods for retrospective claims
• Criminal prosecution for serious violations
• Public naming of non-compliant employers
• Supply chain liability for partner failures

But the path forward is clear:

• Audit everything immediately
• Fix systems and processes now
• Train teams thoroughly
• Build transparency into employment relationships
• Maintain impeccable records
• Treat compliance as investment, not cost

Businesses that take these changes seriously will navigate the transition successfully. Those that delay or ignore the new requirements will face consequences that could be existential.

The Fair Work Agency is already conducting inspections. SSP claims under new rules are being processed. Holiday pay audits looking back six years are happening. This isn’t theoretical – it’s real, it’s now, and it affects every UK employer.

Your move. What will you do today to protect your business and support your workers?