Employment tax update - August 2025

This bulletin follows the release of the August Agent Update (Issue 134). In this issue we cover the content most relevant to employment taxes and reward activities.

Umbrella companies

Agency workers and contractors who are moved between umbrella companies

• Some umbrella companies encourage agency workers and contractors to use tax avoidance schemes. To hide tax avoidance from HMRC, they often move workers between different umbrella companies.
• HMRC has issued Spotlight 71, which provides information on what some of the signs of tax avoidance are to help those working through umbrella companies to identify those signs and report tax avoidance arrangements to HMRC. 

HMRC wins Upper Tier Tribunal case against “mini” umbrella company fraud

• Mini umbrella company fraud is a type of fraud within the temporary labour market. It operates by breaking down one umbrella company into multiple small limited companies, each of which only employs a small amount of workers to exploit incentives such as employment allowance, which reduces their employer National Insurance liability.
• Such a scheme was operated in Elphysic Ltd and Others v The Commissioners of His Majesty’s Revenue and Customs. Mini umbrella companies were registered by organisers of the scheme to create a false impression that they were independent trading entities, not related to one another, when in fact they were all associated and jointly controlled, for the sole purpose of defrauding HMRC. The Upper Tier Tribunal ruled that HMRC were right to deny their claims for employment allowance.
• HMRC has since updated their guidance on mini umbrella company fraud, including specific support for workers who unwittingly fall victim to such arrangements. 

PAYE Settlement Agreement (PSA) – calculations and payment

• With the deadline for the payment of Class 1B national insurance contributions (NICs) liability approaching, employers should submit their PSA calculations online to HMRC, showing the amount of income tax and Class 1B NICs due on the benefits and expenses included on the PSA for the 2024/25 tax year.
• If there are no benefits to declare, employers must submit a nil calculation if they have submitted a PSA for a prior year.
• HMRC will automatically issue a payslip confirming the amount due and the payment reference number when the submitted PSA calculation is processed.
• If employers do not have a payslip, they must use the reference number quoted in the covering letter when the enduring PSA was first formalised. This is known as a SAFE reference, which can be obtained by phoning the employers’ helpline on 0300 200 3200.
• Employers should note that:
  • they do not need to wait until HMRC processes the PSA calculation to make the payment of income tax and Class 1B NICs; and
  • any payments of the PSA liability made after the deadline of 22 October 2025 may accrue late payment interest.

Changes to Overseas Workday Relief (OWR) – live webinar

• From 6 April 2025, the previous rules for non-domiciled status have been replaced with a new tax-residence based system (the foreign income and gains or FIG regime).
• Subject to transitional arrangements, individuals eligible for FIG relief are also eligible for relief on relevant employment income which relates to duties performed outside of the UK.
• HMRC are hosting a live webinar on 16 September 2025, which will focus on:
  • how OWR has changed (e.g., potential availability for up to four tax years and no requirements to have non-UK income paid and retained outside of the UK);
  • new financial limits (e.g., a new cap for OWR of the lower of 30% of employment income and £300,000);
  • the transitional arrangements (including circumstances in which the OWR cap does not apply); and
  • record keeping requirements.
• To attend the webinar, register for the OWR live event.

Changes to Employee Car Ownership Scheme (ECOS) legislation

• The Government is amending the benefit in kind (BIK) rules so that vehicles provided through ECOS arrangements will be deemed as taxable benefits when made available on restricted terms.
• Sections 114 and 116 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) will be amended to deem vehicles provided through qualifying arrangements as taxable BIKs.
• Section 116A ITEPA will be inserted to set out that qualifying arrangements mean the transfer of the ownership of the vehicle to the employee where one or more of the following criteria are met:
  • where there are restrictions on the employee’s private use of the vehicle;
  • where the employee is not the registered keeper of the vehicle; and
  • where, as part of the arrangement, there is a set buyback or onward sale agreement.
• The new measures will take effect from 6 October 2026.

PISCES: Enterprise Management Incentives and Company Share Option Plans

• PISCES (the Private Intermittent Securities and Capital Exchange System) is a new type of stock market that will allow private companies to have their shares traded intermittently.
• The Government has proposed a new measure which will allow existing Enterprise Management Incentives (EMI) and Company Share Option Plan (CSOP) option agreements to be amended to include a sale on a PISCES as an exercisable event.
• Legislation will be introduced to allow EMI and CSOP option agreements entered into before Royal Assent of Finance Bill 2025-26 to be amended to allow options to be exercised, provided that the exercise of the option happens immediately prior to the sale of the shares on a PISCES.
• In order to be valid, the amendment must be either agreed by the employer and employee option holder in writing or notified in writing to the employee.
• The legislation will deem that this event had been included in the option agreement upon grant, so that the EMI and CSOP options retain their tax advantages. 

If you would like us to assist with amending your existing EMI or CSOP option arrangements to incorporate provisions for a sale of shares on a PISCES, please do not hesitate to get in touch with Robert Collard or Clio Pialorsi.