Employment tax update - January 2026

This bulletin follows the release of the December and January Agent Updates (Issue 138 and Issue 139). In these issues we cover the content most relevant to employment taxes and reward activities.
 

Payrolling of Benefits in Kind (BIKs)

• On 26 November 2025, HMRC published draft guidance and legislation to help customers prepare for reporting BIKs in real-time. This guidance and legislation:
  • explains what agents need to consider when advising clients on preparing their employees and payroll functions for real-time reporting from April 2027;
  • includes worked examples of how the taxable values of specific BIKs can be calculated;
  • provides draft legislation to aid understanding of the changes to reporting BIKs to HMRC from April 2027; and
  • confirms that a registration service for the voluntary payrolling of employer-provided loans and accommodation will go live from November 2026.
• Clients and their agents should review the interim guidance to prepare for the upcoming changes, for example, by making a list of all BIKs provided and usually reported to HMRC using the P11D forms.
• To assist payroll software providers, HMRC sent technical documentation to software developers in November 2025, detailing the planned changes to the Real-Time Information required for the upcoming payrolling of BIKs.
• Final guidance will be published ahead of mandatory payrolling of BIKs coming into effect in April 2027.  

Salary sacrifice reform for pension contributions

• At the 2025 Autumn Budget the Government announced that from April 2029 an employer and employee National Insurance Contributions (NICs) charge will be applied on employer pension contributions made by salary sacrifice above a threshold of £2,000 per annum.
• Pension contributions made by salary sacrifice will remain exempt from income tax.
• Employers will need to report the total amount sacrificed through their existing payroll software. More guidance in relation to the cap will be published by HMRC at a later date.

Clarification of optional remuneration arrangement (OpRA) rules 

• The OpRA rules introduced in April 2017 largely removed the tax and NICs advantages for benefits provided through salary sacrifice arrangements.
• HMRC is aware of third-party scheme providers advertising salary sacrifice schemes, such as grocery vouchers, which incorrectly claim they can make savings on employee NICs, with HMRC approval. HMRC does not approve businesses to advertise their schemes as tax compliant.
• It should be noted that the ultimate responsibility for income tax and NICs rests with the employer and so employers must independently verify scheme compliance with regulations.
• Where vouchers are provided under OpRA, the amount that is taxable is the higher of the:
  • amount of earnings given up; and
  • the amount of money for which the voucher can be exchanged in cases of a cash voucher, or the cost of providing the voucher if it is a non-cash voucher.
• Non-cash vouchers provided through salary sacrifice, where the employer facilitates provision, are treated as earnings under NICs legislation and attract both employee and employer Class 1 NICs. This includes the provision of vouchers, pre-loaded cards, other credit tokens, or company credit cards.
• If non-cash vouchers meet specific exemption requirements in Schedule 3 of the Social Security Contributions Regulations 2001, they will not form part of an employee’s earnings and therefore will not be subject to employee or employer Class 1 NICs.  

Disguised remuneration: tax avoidance using unfunded pension arrangements

• Following two General Anti Abuse Rule (GAAR) Advisory Panel opinions on:
  • reward through creation and sale of a pension obligation with consideration paid to the owner of the pension obligation; and
  • reward through creation of an obligation to make pension payments to employees and the transfer of that obligation to another employee in exchange for payment,

HMRC has updated its guidance on disguised remuneration: tax avoidance using unfunded pension arrangements.

• The GAAR Advisory Panel determined that the unfunded pension arrangements did not constitute a reasonable course of action to undertake or implement.
• HMRC strongly advises anyone who may be using such schemes to withdraw from them and settle their tax affairs. 

Overseas Workday Relief (OWR) and the character of earnings paid

• HMRC has published new guidance on globally mobile employees: Overseas Workday Relief (OWR) and the characterisation of earnings.
• Where an employee benefits from OWR in a pre-April 2025 tax year, it is necessary to determine to what extent their general earnings for that year relate to duties performed in or outside the UK, and when any overseas earnings are remitted to the UK.
• The new guidance clarifies how an employer may determine the composition of a payment of earnings and the extent to which tax paid by PAYE should be considered as UK or overseas earnings.
• Individuals filing or amending their self-assessment tax returns for the pre-April 2025 tax years will need to familiarise themselves with the new guidance and apply it where relevant.
• As a reminder, the rules on OWR changed from 6 April 2025 and therefore individuals will need to consider the application of the new rules to their employment income from April 2025 onwards. Read our April employment taxes update for a summary of the changes to the OWR rules. 

Voluntary NICs for period abroad

• At the 2025 Autumn Budget the Government announced that starting from April 2026 payments of voluntary Class 2 NICs for time abroad will end.
• Individuals will only be able to pay voluntary Class 3 NICs for time abroad. Any new applicants who want to apply to pay voluntary Class 3 NICs will need to have 10 years of continuous UK residency or payments of NICs.
• HMRC encourages individuals to review the latest guidance about voluntary NICs for periods abroad from April 2026. 

Student and postgraduate loans thresholds and rates for 2026/2027

• The new student loan plan type and postgraduate loan thresholds and rates will change from 6 April 2026 as follows:
  • Plan 1 - £26,900;
  • Plan 2 - £29,385;
  • Plan 4 - £33,795;
  • Plan 5 - £25,000; and
  • Postgraduate loan - £21,000.
• Deduction rates for student and postgraduate loans will remain at 9% and 6% respectively.
• HMRC is now updating the Starter checklist ahead of the new tax year for 6 April 2026 to include new student loan plan type 5 and to clarify options for customers with multiple loan types.
• The key changes are as follows:
  • a new Plan 5 checkbox added to the PDF and online versions; and
  • will now only be able to select one student loan plan type on the online version, however, they can still select postgraduate loan at the same time as student loan plan types.
• Student loan and postgraduate loan repayment guidance for employers will be updated on 6 April 2026.