What the workers rights reform bill means for UK employers

The UK government has confirmed the revised terms of its wide-ranging workers’ rights reform programme, now enacted through the Employment Rights Act 2025. Although some of the original proposals have been softened, the legislation still represents the most significant change to UK employment law in many years.

For business owners and employers, the key issue is not whether these changes will affect them, but when and how. The reforms are being introduced in phases across 2026 and 2027, creating both a window to prepare and a period of ongoing uncertainty for those planning recruitment, restructures or cost control.

This article outlines the main changes and explains why early awareness and planning are important.

A major shift in employment rights

The Act brings together reforms covering unfair dismissal, statutory payments, family leave, trade union engagement and sector-level pay setting. The stated aim is to modernise workplace protections while maintaining flexibility for employers.

While the final legislation reflects compromises reached after consultation, the overall direction is clear. Employment rights will apply earlier, cover more people, and in some cases expose employers to higher financial risk.

Reduced qualifying period for unfair dismissal

One of the most important changes concerns unfair dismissal protection.

Previously, most employees needed two years’ service before they could bring an unfair dismissal claim. Early proposals would have made this a day-one right, but this has been revised.

Under the new rules, employees will qualify for unfair dismissal protection after six months’ service. This is still a substantial reduction from the previous position and will have a practical impact on probationary periods and early employment decisions.

In addition, the statutory cap on unfair dismissal compensation is being removed. This means awards will no longer be subject to a fixed maximum, increasing potential exposure where disputes arise.

Day-one rights for family and bereavement leave

Several forms of leave will now be available from the first day of employment.

These include statutory paternity leave, unpaid parental leave and new bereavement leave provisions. Minimum service requirements are being removed to reflect modern family arrangements and expectations.

For employers, this means entitlement arises immediately, which may affect workforce planning, particularly for smaller teams where short-term absences can have a noticeable operational impact.

Changes to statutory sick pay

Statutory Sick Pay is also being reformed.

Eligibility will no longer depend on meeting a minimum earnings threshold. This extends entitlement to lower-paid workers, part-time staff and those with irregular hours who were previously excluded.

Although the rate of Statutory Sick Pay itself is not significantly changed, the widening of eligibility is expected to increase employer costs and administrative demands. Payroll systems and sickness policies will need to be reviewed to ensure compliance.

Trade union rights and industrial relations

The legislation strengthens trade union rights and revises the framework for industrial relations.

Changes include simplified procedures for union recognition and industrial action, increased protections for workers participating in lawful strike action, and the repeal of earlier requirements for minimum service levels during strikes in certain sectors.

Employers will also be required to inform workers of their right to join a trade union and engage more actively with recognised unions where they exist. For some businesses, this represents a material shift in how employee relations are managed.

Consultation on tips and service charges

Employers operating tipping, gratuity or service charge arrangements will face new consultation obligations.

The rules require consultation with recognised trade unions or, where none exist, directly with workers on how tips are distributed. Employers must also publish the outcome of these consultations.

This is particularly relevant to hospitality and service businesses, where transparency around tips has become an increasingly sensitive issue.

Sector-level pay agreements

The Act introduces the framework for Fair Pay Agreements in specific sectors, starting with adult social care.

These arrangements allow sector-level bodies to set minimum pay and employment terms. While initially limited in scope, this marks a potential shift away from pay being determined solely at individual employer level.

Businesses operating in affected sectors will need to monitor developments closely, as future expansion of this model could have cost and compliance implications.

Further reforms still under development

Not all elements of the reform package are finalised. Several measures remain subject to further consultation and secondary legislation.

These include proposals to restrict fire and rehire practices, new duties to prevent sexual harassment, enhanced protections during and after pregnancy, and potential extensions to flexible working rights.

As a result, employment law will continue to evolve over the next two years.

What employers should do next

Taken together, these reforms increase both the scope and complexity of employment obligations.

Key implications include earlier legal exposure, increased administrative requirements, higher potential compensation risks and a stronger emphasis on consultation and engagement.

For many businesses, particularly small and medium-sized employers, early review of employment contracts, staff handbooks, probation procedures and dismissal processes will help reduce risk. Budgeting for potential increases in absence-related costs is also advisable.

Professional advice can help employers understand the financial and operational impact of these changes and plan accordingly. Reviewing your position now may prove far less costly than reacting once the new rules are fully in force.

For many taxpayers, an increase in income feels like a straightforward positive. Higher earnings should mean more disposable income, even after paying a bit more tax. In practice, the UK tax and benefits system does not always work that way.

There are a number of income thresholds built into the system where allowances and state benefits are reduced or withdrawn altogether once income exceeds a certain level. These losses are often not obvious at the time income increases. Instead of appearing as a new tax charge, they show up as missing allowances or benefits that simply stop.

Understanding how these thresholds work is important, particularly for people whose income fluctuates from year to year or who are close to key limits. Without planning, a relatively modest increase in income can result in a much larger increase in the overall tax burden, or a loss of benefits.

Income thresholds and hidden tax costs

Unlike headline tax rates, these thresholds are rarely discussed in simple terms. They sit in the background of the tax system and can be triggered by events such as bonuses, pay rises, dividends, pension withdrawals or investment income.

What makes them particularly challenging is that the loss of relief or benefit is often sudden. In many cases there is no gradual taper, and even where a taper applies, the effective marginal tax rate can become surprisingly high.

Below are some of the most common examples where rising income can have unintended consequences.

Marriage allowance and moving into higher rate tax

The marriage allowance allows one spouse or civil partner to transfer a portion of their unused personal allowance to the other. This can reduce the recipient’s tax bill, but only where the recipient remains a basic rate taxpayer.

If the recipient’s income increases so that they become a higher rate taxpayer, the marriage allowance is lost entirely for that tax year. There is no partial reduction or taper.

This means that a small increase in taxable income, perhaps due to overtime, a bonus or additional investment income, can result in the full loss of the allowance. Many couples only become aware of this after the tax year has ended, when the tax calculation is prepared and the allowance has already been removed.

Winter fuel allowance and income limits

Recent changes mean that entitlement to the winter fuel allowance is now linked to income. Where an individual’s income exceeds £35,000, the allowance is withdrawn.

This change particularly affects pensioners with mixed sources of income, such as occupational pensions, part-time work or savings income. Because total taxable income can vary from year to year, some individuals may move in and out of entitlement without realising why.

As the allowance is not claimed through the tax return in the same way as many reliefs, the connection between income levels and entitlement is not always clear. The result is often confusion when the payment does not arrive.

Child benefit and higher income households

Child benefit remains one of the most valuable forms of state support for families, but it is also one of the most misunderstood when it comes to income thresholds.

Where one parent has income above £60,000, a high income child benefit charge applies. As income increases above this level, child benefit is gradually clawed back through the tax system. Once income reaches £80,000, the benefit is fully withdrawn.

Importantly, the test applies to the income of the highest earning parent, not to combined household income. This can produce outcomes that feel unfair, particularly where one household has two moderate earners and another has a single higher earner.

The charge is often triggered by one-off income events rather than permanent changes in earnings. Bonuses, dividend payments or the sale of investments can all push income over the threshold for a single tax year, resulting in an unexpected tax bill.

Personal allowance withdrawal above £100,000

One of the most significant thresholds in the UK tax system applies once income exceeds £100,000.

For every £2 of income above this level, £1 of the personal allowance is withdrawn. This continues until the allowance is reduced to nil once income reaches £125,140.

The effect is a high effective tax rate on income within this band. Taxpayers are paying higher rate tax while also losing the benefit of tax-free income at the same time. In practical terms, the marginal tax rate can exceed 60 percent.

This issue commonly affects senior employees, professionals and business owners whose income varies year by year. It is particularly easy to cross the threshold unexpectedly when income comes from multiple sources.

Pension tax relief and higher earners

Pension contributions are often used as a way to manage taxable income, but the interaction between income levels and pension tax relief can be complex.

As income increases, the structure and value of pension relief can change. Higher earners may be affected by the tapered annual allowance, which reduces the amount that can be contributed to pensions with full tax relief.

In some cases, making pension contributions without careful planning can result in reduced relief or even unexpected tax charges. Understanding how income levels affect pension allowances is essential, particularly for those with variable or rising earnings.

Why these issues are often missed

What these examples have in common is that the impact is rarely obvious from payslips alone. Many allowances and benefits are assessed separately from day-to-day payroll, and the consequences may only become clear when a tax return is prepared or when a benefit is withdrawn.

It is also common for individuals to be affected by more than one threshold at the same time. A single increase in income can trigger multiple losses, compounding the overall effect.

Because the rules are complex and spread across different parts of the tax and benefits system, the true cost of higher income is often underestimated.

The value of forward planning

The good news is that many of these outcomes can be managed with advance planning. Timing of income, pension contributions, charitable donations and the way income is shared between spouses can all influence whether key thresholds are crossed.

Regular reviews are particularly important for anyone approaching one of the income limits discussed above or whose income varies from year to year. Understanding where income is likely to fall before the end of the tax year creates opportunities to make informed decisions while there is still time to act.

If you are unsure how close your income is to any of these thresholds, or if a recent increase in earnings may have unintended consequences, professional advice can help you understand your position and avoid unnecessary loss of allowances and benefits.

If you feel this alert could help a business colleague or family member, please feel free to share it with them.

In December 2025, HM Revenue and Customs announced the finalists in a competition aimed at helping close the UK tax gap. The initiative forms part of HMRC’s wider effort to modernise tax administration and improve its ability to identify and address deliberate tax evasion. The announcement signals a growing reliance on external innovation and data driven solutions to support compliance activity.

Purpose of the competition
The competition was launched earlier in 2025 with the aim of encouraging private sector organisations to develop practical tools that could strengthen HMRC’s compliance capabilities. Rather than focusing on theoretical ideas, the emphasis has been on solutions that can be tested in live environments and potentially embedded into HMRC’s existing systems.

The tax gap, which represents the difference between tax theoretically due and tax actually collected, remains a central concern for government. Reducing it is seen as a way of supporting public finances without increasing headline tax rates, while also reinforcing confidence in the fairness of the tax system.

The shortlisted finalists
Two organisations were selected as finalists and will now work alongside HMRC during a twelve month pilot phase. This next stage is intended to test how effectively their proposed technologies perform in practice and whether they can deliver measurable improvements in identifying non-compliance and tax evasion.

During the pilot period, HMRC will assess how well the solutions integrate with existing processes and whether they provide actionable insights that compliance teams can use. The focus is on outcomes rather than experimentation for its own sake, with a clear expectation that successful tools could be adopted more widely.

Government and HMRC perspective
Ministers have framed the competition as a practical way of harnessing specialist expertise from outside government. By partnering with private sector innovators, HMRC can access advanced analytical techniques and technological approaches that may be difficult to develop internally at pace.

Senior HMRC officials have also highlighted the value of collaboration. Closing the tax gap is described as a complex challenge that requires new ways of thinking, particularly as economic activity becomes more digital and sophisticated. External partnerships are seen as one way of keeping HMRC’s compliance approach aligned with modern risks.

Role of small and medium sized businesses
One notable aspect of the competition has been the level of engagement from small and medium sized enterprises. More than half of the submissions reportedly came from SMEs, demonstrating that innovation in tax technology is not limited to large multinational firms.

This reflects a broader trend in public sector procurement, where agility and specialist knowledge are increasingly valued alongside scale. Smaller firms often bring focused expertise and innovative approaches that can complement the resources of larger organisations.

What this means going forward
The pilot phase will be critical in determining whether the finalists’ solutions deliver real benefits. If successful, the technologies could form part of HMRC’s longer term strategy for improving compliance and reducing tax losses from evasion and error.

For taxpayers and advisers, this initiative underlines HMRC’s continued investment in data analysis and technology. While the stated aim is to target deliberate non-compliance, it also reinforces the importance of accurate reporting and robust record keeping across all sectors.

Conclusion
HMRC’s competition to help close the tax gap highlights a clear direction of travel. The department is increasingly looking beyond traditional methods and drawing on private sector innovation to strengthen compliance activity. The outcome of the pilot phase will be closely watched, as it may shape how HMRC approaches tax enforcement and risk assessment in the years ahead.

As part of the Budget measures, the government confirmed plans to make some changes to the Construction Industry Scheme (CIS).

From 6 April 2026, HMRC will be able to take immediate action where a business makes or receives a payment that it knew, or should have known, was connected to fraud. In these circumstances, HMRC will have the power to remove Gross Payment Status (GPS) with immediate effect, assess the business for the associated tax loss, and impose a penalty of up to 30%. This penalty may be applied to the business itself or to its officers. Where GPS is withdrawn due to fraud or serious non-compliance, the business will also be barred from reapplying for GPS for a period of five years (an increase from the current one-year limit).

Alongside these measures, the government also plans to simplify the CIS by exempting payments to local authorities and certain public bodies. As part of this change the requirement for construction contractors to submit nil returns will be required. These changes are due to take effect from 6 April 2026 and will first be subject to technical consultation.

The CIS is a set of special tax and National Insurance rules for businesses operating in the construction industry. Under the scheme, businesses are classed as either contractors or subcontractors, and both must understand their tax obligations.

Qualifying contractors are required to deduct tax from payments made to subcontractors and pass these deductions to HMRC. The amounts deducted count as advance payments towards the subcontractor’s tax and National Insurance liabilities.

Subcontractors are not required to register for the CIS, but where they are not registered, contractors must deduct tax at a higher rate of 30%. Registered subcontractors are subject to a 20% deduction unless they qualify for GPS. Where GPS applies, no deductions are made by the contractor, and the subcontractor is responsible for paying all tax and National Insurance at the end of the tax year.

To qualify for GPS, a subcontractor must meet specific criteria, including a strong compliance history of paying tax and National Insurance on time, and carrying on a business that undertakes construction work or supplies construction labour in the UK.

In late 2025 the government confirmed a significant change of direction on inheritance tax reliefs for farmers and family owned businesses. Following sustained criticism of earlier proposals, ministers announced an increase in the threshold at which full inheritance tax relief applies to qualifying agricultural and business assets. The move has been widely described as an about face, reflecting the strength of opposition from the farming and rural business community.

What has changed From 6 April 2026, the threshold for full Agricultural Property Relief and Business Property Relief will rise from £1 million to £2.5 million per estate. Where spouses or civil partners jointly hold assets, this effectively allows up to £5 million of qualifying property to be passed on free of inheritance tax.

Relief will still be available above this level, but at a reduced rate. The revised structure is intended to protect the majority of working farms and trading businesses, while limiting unlimited relief for the largest estates.

Why the government reversed its position The original proposals, announced as part of earlier Budget measures, triggered strong reactions across the agricultural sector. Many farmers argued that a £1 million cap bore little resemblance to modern land and business values, particularly in areas where farmland prices have risen sharply over the past decade.

There was widespread concern that families could be forced to sell land or business assets simply to fund inheritance tax liabilities, undermining long term succession planning and the viability of family farms. Protests, lobbying by representative bodies, and sustained media attention kept the issue firmly in the public eye.

In responding to these concerns, the government acknowledged that it had listened to feedback and accepted that the earlier threshold risked unintended consequences for ordinary family enterprises.

Government rationale Ministers have framed the revised threshold as a balanced solution. The stated aim is to protect productive farms and genuine trading businesses, while still ensuring that inheritance tax applies more effectively to large estates.

The government has also emphasised the economic and social importance of family farms and small to medium sized businesses, particularly in rural communities. By raising the threshold, it expects to significantly reduce the number of estates affected by the reforms compared with the original proposals.

Reaction from the sector Farming organisations and business groups have broadly welcomed the announcement, describing it as a sensible and pragmatic adjustment. For many families, the increased

threshold removes immediate pressure and provides greater certainty when planning for succession.

That said, some commentators have noted that the revised rules do not eliminate inheritance tax exposure altogether. Larger estates and asset rich businesses will still need to consider how reduced relief above the threshold may affect long term planning.

Planning implications For farmers and business owners, the change offers welcome breathing space, but it does not remove the need for careful inheritance tax planning. Asset values, ownership structures, partnership arrangements, and the interaction with other reliefs remain critical factors.

Early planning remains essential, particularly for estates approaching or exceeding the new thresholds. Professional advice can help families understand how the revised rules apply to their circumstances and avoid unexpected liabilities.

Conclusion The increase in inheritance tax relief thresholds represents a clear shift in government policy. It highlights how sustained sector engagement can influence tax decisions, and it provides greater reassurance for family farms and businesses heading into the 2026 tax year. However, with reliefs still capped and reduced above certain levels, inheritance tax planning remains firmly on the agenda.

1 January 2026 – Due date for Corporation Tax due for the year ended 31 March 2025

19 January 2026 – PAYE and NIC deductions due for month ended 5 January 2026. (If you pay your tax electronically the due date is 22 January 2026).

19 January 2026 – Filing deadline for the CIS300 monthly return for the month ended 5 January 2026. 

19 January 2026 – CIS tax deducted for the month ended 5 January 2026 is payable by today.

31 January 2026 – Last day to file 2024-25 self-assessment tax returns online.

31 January 2026 – Balance of self-assessment tax owing for 2024-25 due to be settled on or before today unless you have elected to extend this deadline by formal agreement with HMRC. Also due is any first payment on account for 2025-26.

1 February 2026 – Due date for Corporation Tax payable for the year ended 30 April 2025.

19 February 2026 – PAYE and NIC deductions due for month ended 5 February 2026. (If you pay your tax electronically the due date is 22 February 2026)

19 February 2026 – Filing deadline for the CIS300 monthly return for the month ended 5 February 2026. 

19 February 2026 – CIS tax deducted for the month ended 5 February 2026 is payable by today.

There is now less than 1 months to the self-assessment filing deadline for submissions of the 2024-25 tax returns. We urge our readers who have not yet completed and filed their 2024-25 tax return to file as soon as possible to avoid the stress of last-minute preparations as the 31 January 2026 deadline fast approaches.

You should also be aware that payment of any tax due should also be made by this date. This includes the remaining self-assessment balance for the 2024-25 tax year, and the first payment on account for the 2025-26 tax year.

Earlier this year, more than 11.5 million people submitted their 2023-24 self-assessment tax returns by the 31 January deadline. This included 732,498 taxpayers who left their filing until the final day and almost 31,442 that filed in the last hour (between 23:00 and 23:59) before the deadline!

There is a new digital PAYE service for the High Income Child Benefit Charge (HICBC). This allows Child Benefit claimants who previously used self-assessment solely to pay the charge to opt out and instead pay it through their tax code.

If you are filing online for the first time you should ensure that you register to use HMRC’s self-assessment online service as soon as possible. Once registered an activation code will be sent by mail. This process can take up to 10 working days. 

If you miss the filing deadline you will be charged a £100 fixed penalty (unless you have a reasonable excuse) which applies even if there is no tax to pay, or if the tax due is paid on time. 

There are further penalties for late tax returns still outstanding 3 months, 6 months and 12 months after the deadline. There are additional penalties for late payment of tax amounting to 5% of the tax unpaid at 30 days, 6 months and 12 months.

The new rules will allow companies to raise more capital under the following schemes although investors will need to factor in reduced VCT Income Tax relief when assessing opportunities.

The Venture Capital Trusts (VCT) and Enterprise Investment Scheme (EIS) are designed to encourage private investment into trading companies. Both schemes help support business growth while at the same time encouraging individuals to fund these companies.

A number of changes to the schemes were announced at Budget 2025 and will apply from 6 April 2026.

The main changes are as follows:

• Gross assets limits: Companies’ gross assets will increase for EIS and VCT eligibility to £30 million immediately before the share issue (from £15 million) and £35 million immediately after the issue (from £16 million).
• Annual investment limits: Companies will be able to raise up to £10 million annually (from £5 million) and £20 million for knowledge-intensive companies (from £10 million).
• Lifetime investment limits: Companies’ lifetime limit will increase to £24 million (from £12 million), and £40 million for knowledge-intensive companies (from £20 million).
• VCT Income Tax relief: The rate of Income Tax relief for individuals investing in VCTs will reduce from 30% to 20%.

These increases in annual, lifetime and gross assets apply only to qualifying companies that are not registered in Northern Ireland and are not engaged in trading goods, or in the generation, transmission, distribution, supply, wholesale trade, or cross-border exchange of electricity.

These companies remain eligible under the current scheme limits.

These changes are designed to encourage larger investments into qualifying companies. 

Investors should be aware of the reduced VCT Income Tax relief available and ensure that investments still remain worthwhile.

If you live abroad and sell your UK home, you may have to pay Capital Gains Tax (CGT) on any gain made since 5 April 2015. Only the portion of the gain made after 5 April 2015 is liable for tax. One of the most commonly used and valuable exemptions from CGT is Private Residence Relief (PRR), which applies when a property has been used as your main family home. Investment properties that have never been your main residence do not qualify for any CGT relief.

For non-UK residents, PRR can still apply, but there are additional conditions. You may not have to pay CGT for any tax year in which you, your spouse, or civil partner spent at least 90 days in the UK home, provided you meet the necessary conditions and nominate it as your only or main home when reporting the sale to HMRC.

Certain parts of the property, such as areas let out, used exclusively for business, or grounds larger than 5,000 square metres, may reduce the relief. You also automatically receive relief for the last nine months of ownership (or 36 months if you are disabled or in long-term care). 

Regardless of whether any tax is due, you must submit a Non-Resident CGT (NRCGT) return and pay any CGT within 60 days of the sale. Penalties apply if the return is late or tax is unpaid by the deadline. Even if there is no CGT to pay the return must still be submitted by the deadline.

The recent Budget may not have delivered many dramatic headline changes, but as the detail settles, a number of important themes are beginning to emerge. Conversations with business owners suggest that concern is less about any single announcement and more about the combined effect of rising costs, higher personal tax exposure and increasing administrative demands.

These issues provide both a warning sign and an opportunity to plan more proactively.

Rising employment costs and staffing pressure

One of the most immediate challenges for many businesses is the rising cost of employing staff. Increases to minimum wage rates have a direct impact on payroll, but the wider effect often runs deeper. When entry level pay rises, expectations across the workforce frequently follow, leading to pressure on pay differentials and overall salary structures.

Employer National Insurance contributions and workplace pension costs continue to add to the total cost of employment. For businesses operating on tight margins, particularly in labour intensive sectors, this can quickly erode profitability. Some owners are already reviewing staffing levels, recruitment plans and working patterns to maintain control over costs.

Fiscal drag and higher personal tax bills

Another issue gaining traction is the continued freeze on income tax and National Insurance thresholds. As profits and salaries increase in line with inflation, more individuals are being pulled into higher tax bands without any meaningful increase in real income.

For owner managed businesses, this has a direct impact on decisions about salary, dividends and profit extraction. Dividend tax rates have risen in recent years; allowances remain static and the scope for tax efficient income planning has narrowed. The result is that after increases in remuneration, many business owners are paying more tax without a significant increase in take home pay (taxed earnings).

Fiscal drag can be easy to overlook, but over time it represents a significant and often underestimated increase in the overall tax burden.

Cash flow and financing costs

Higher interest rates continue to weigh heavily on businesses that rely on overdrafts, loans or asset finance. Even where inflation is easing, the cost of borrowing remains elevated, increasing monthly outgoings and putting pressure on cash flow.

Many business owners were looking to the Budget for measures that might ease short term funding pressures. In practice, most support is indirect, leaving businesses to manage higher financing costs alongside rising wages and operating expenses.

This has led some businesses to delay investment, hold back on expansion or prioritise cash retention over growth.

Investment decisions and uncertainty

Capital allowances and investment incentives still attract interest, but with growing caution. While reliefs can improve the tax efficiency of capital expenditure, uncertainty about how long they will remain in place makes long term planning more difficult.

Business owners are increasingly reluctant to base significant investment decisions solely on tax incentives that could change in future Budgets. Stability and predictability are now key factors in deciding when and how to invest.

Increasing compliance and administrative demands

Alongside cost pressures, businesses are also facing a gradual increase in administrative and reporting requirements. Developments such as the expansion of Making Tax Digital, Companies House reforms and enhanced transparency obligations all add to the compliance burden.

Individually, these changes may appear manageable. Collectively, they contribute to a sense that running a business is becoming more complex and time consuming, particularly for smaller organisations without in house finance teams.

A cumulative challenge rather than a single issue

What stands out following this Budget is not one specific measure, but the cumulative impact of multiple pressures moving in the same direction. Higher employment costs increased personal tax exposure, tighter cash flow and growing compliance requirements all reduce flexibility and increase risk.

This reinforces the importance of forward planning. Reviewing business structures, remuneration strategies, cash flow forecasts and investment plans can help you adapt to a more demanding environment and avoid reactive decision making.

How we can help

This is an ideal time to engage in meaningful discussions about your planning options. Small changes, implemented early, can often make a significant difference over time.

If any of these issues are affecting your business, please get in touch so we can help you review your position and consider the most appropriate next steps.