Employment tax update - July 2025

This bulletin follows the release of the July Agent Update (Issue 133). In this issue we cover the content most relevant to employment taxes and reward activities.

Technical amendments to residence-based tax regime

• On 21 July 2025, the Government announced that the Finance Bill 2026 would include provisions correcting a number of technical issues with the Finance Act 2025 that implemented the shift to a residence-based tax regime from 6 April 2025, including:
  • placing the new digital process for globally mobile employee PAYE notifications for treaty non-residents on a statutory footing; and
  • ensuring that the temporary repatriation facility works as intended for offshore income gains and migrating trusts.
• No draft legislation has been published at this stage. The Government will set out further details in due course. 

 Policy on tackling non-compliance in the umbrella company market

• The Government published a policy paper on 21 July 2025, which is most likely to impact entities that use workers who are engaged by umbrella companies.
• The policy seeks to:
  • close the tax gap; and
  • prevent workers facing large, unexpected bills for income tax and national insurance contributions (NICs) that have not been paid by non-compliant umbrella companies.
• As a background, the current legislation relating to the tax treatment of employment income provided to workers engaged via employment intermediaries is set out in chapters seven to 10, part two of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).
• Legislation will be introduced in Finance Bill 2026 to amend part two of ITEPA, introducing a new chapter 11 to make employment agencies or end clients jointly and severally liable for any amount required to be accounted for under the PAYE provisions where an umbrella company forms part of a labour supply chain.
• Further legislation will be introduced to amend section 4A of the Social Security Contributions and Benefits Act 1992 to provide the Treasury with the power to make regulations imposing an equivalent joint and several liability for NIC purposes.
• Joint and several liability will allow HMRC to pursue an agency in the first instance for any payroll taxes that the non-compliant umbrella company fails to remit to HMRC on their behalf. The end client will be liable if contracting directly with an umbrella company. 

Transformation roadmap

• As part of HMRC’s aim to modernise the tax system, in 2025/26 HMRC will:
  • introduce a new online service for PAYE taxpayers, accessible from online personal tax accounts and HMRC’s app, to allow easier checking, updating and understanding of taxpayers’ affairs;
  • launch a PAYE expense service for submitting relief claims and uploading supporting documents;
  • enhance digital options for NICs refunds; and
  • aid self-assessment registration and discontinuation through digital tools. 

Making Tax Digital (MTD)

• On 21 July 2025, HMRC published draft legislation amending MTD for income tax and the associated penalty provisions. The changes are stated to refine and simplify MTD for income tax by, for example, defining the individuals and partnerships within MTD’s scope.
• The changes implement measures announced in the Spring 2025 Statement to:
  • require taxpayers to submit end of year self-assessment returns (and any amendments to returns) using functional compatible software;
  • extend MTD to relevant persons with qualifying income over £20,000 from 6 April 2028; and
  • introduce permanent exemptions for non-UK resident entertainers and sportspeople and individuals with a power of attorney, and exemptions until at least April 2029 for religious ministers and taxpayers in receipt of married couples’ or blind persons’ allowances.
• The draft legislation also amends, from 1 April 2026, Schedules 24 and 26 to Finance Act 2021 to provide that HMRC may cancel penalty points awarded for late filing of returns and any associated penalties, and penalties for late payment of tax. Additionally, HMRC may reset a person’s total of late filing penalty points to zero earlier than those points would have otherwise expired. 

Class 2 NICs

• HMRC are working through to resolve an issue affecting some self-assessment taxpayers in relation to Class 2 NICs for the 2024/25 tax year.
• Individuals have seen a charge of Class 2 NICs added to their account when they should not have been.
• Individuals will be issued with a new SA302 tax calculation after their record has been corrected with a new 30-day limit.
• Incorrect Class 2 NICs letters will continue to be issued until the IT problem is resolved in September, but HMRC are aiming to correct records before any incorrect amounts due affect the tax owed for 2024/25.
• Individuals who may have made a payment will either be refunded or have a credit added to their self-assessment statement.