PAYE in 2026: what small employers need to get right
Running payroll sounds straightforward until it isn’t. With several changes taking effect from April 2026 and HMRC’s penalty regime tightening under the Finance Act 2026, now is a good time to check your PAYE housekeeping is in order.
For most small employers, PAYE ticks along quietly in the background — until something goes wrong. A missed Real Time Information submission, a miscalculated National Insurance contribution, or an overlooked auto-enrolment obligation can quickly become a compliance headache that costs far more than the original error.
April 2026 brought a handful of changes that every employer should be across: new National Minimum Wage rates, an expanded list of tax-free reimbursable benefits, and a shift in how homeworking expenses are treated. At the same time, the Finance Act 2026 has strengthened HMRC’s hand when it comes to penalising non-compliance. None of this is cause for alarm — but it does mean sloppy payroll habits carry more risk than they used to.
In this post we set out the key changes, flag the mistakes we see most often in practice, and explain where getting the fundamentals right makes the biggest difference.
What changed for employers in April 2026
Several updates came into force around the start of the 2026/27 tax year, and a few are worth pausing on.
National Minimum Wage
New NMW rates applied from 1 April 2026. If you haven’t already updated your payroll software to reflect the current rates, do it now. Underpaying the minimum wage — even inadvertently — is one of the most common triggers for HMRC intervention, and the reputational fallout is disproportionate to the original error.
Small Employers’ Relief
The compensation rate for Small Employers’ Relief increased from 8.5% to 9% from April 2026. If your total employer National Insurance liability is £45,000 or less per year, you should be claiming this when recovering Statutory Maternity, Paternity, Adoption, or Shared Parental Pay from HMRC. If you weren’t claiming it before, or weren’t aware it had increased, it’s worth reviewing your position.
Reimbursed benefits: what’s now tax-free
From 6 April 2026, employers can reimburse employees for certain qualifying costs — including eye tests, flu vaccinations, and homeworking equipment — without triggering a PAYE or National Insurance liability, provided the relevant conditions are met. This is a practical win for employers who want to support their team without creating an administrative burden. That said, the conditions do matter, so it’s worth understanding the rules before assuming everything qualifies.
Homeworking expenses: the relief that disappeared
On the other side of the ledger, tax relief for non-reimbursed homeworking expenses was removed from 6 April 2026. Employees who previously claimed this through their Self Assessment return or via PAYE code adjustment can no longer do so unless the employer is making a formal reimbursement. This is worth communicating to any employees who had been claiming it informally.
RTI: the rule most employers underestimate
Real Time Information has been mandatory for all employers since April 2014, but it remains one of the most common sources of PAYE errors — particularly for smaller businesses running payroll themselves.
The RTI requirement is straightforward in principle: you must submit payroll information to HMRC on or before the date you pay your employees. Not at the end of the month. Not the day after. On or before payment. HMRC’s systems are designed to flag submissions that arrive late, and penalties follow.
Late RTI submissions carry penalties ranging from £100 to £500 per occurrence, depending on the number of employees. Miss enough of them and HMRC takes a closer interest in your wider payroll compliance. Annual return penalties can reach £3,000, and reconciliation delays beyond 19 April attract £100-per-month charges that stack up quietly.
The practical fix is simple: treat the payroll submission as part of the same action as running payroll itself, not a separate step you come back to later. Most cloud payroll tools make this easy — submitting to HMRC is built into the process rather than an extra task. If your current setup requires you to remember to submit separately, that’s a workflow worth changing.
It’s also worth noting that RTI serves a purpose beyond compliance. When employees change jobs, HMRC uses RTI data to ensure their tax codes are updated promptly. Employers who report accurately and on time are, in a small but real way, helping their staff avoid unexpected tax bills at year end.
The difference between a genuine mistake and a compliance problem often comes down to one thing: whether you kept decent records and responded promptly when HMRC asked questions.
The PAYE mistakes we see most often
In our experience, payroll errors in small businesses tend to cluster around a few recurring themes rather than being random. Knowing where the risk sits is half the battle.
Miscalculating PAYE and National Insurance
This usually comes down to using the wrong tax code, applying the wrong NI category, or not updating rates at the start of the tax year. The errors are often small individually, but they compound — and when HMRC reconciles, you’re the one left explaining the discrepancy.
Misclassifying employees as contractors
This one is significant. If someone is genuinely employed — working regular hours, under your direction, using your equipment — running them through a self-employed invoice rather than payroll is non-compliant. HMRC calls this false self-employment, and it carries substantial back-tax liability. The Finance Act 2026’s strengthened penalty provisions make this an even more costly area to get wrong.
Overlooking auto-enrolment
If you have eligible workers, pension auto-enrolment is not optional. Non-compliance penalties from The Pensions Regulator start at £400 and can reach £10,000 per day for persistent failures. We’ve seen small employers caught out simply because they didn’t realise a part-time or variable-hours worker qualified. When in doubt, check — the eligibility thresholds are not always intuitive.
Benefits in kind recorded incorrectly
Company cars, health insurance, and other non-cash benefits need to be reported correctly — either through payrolling benefits or via a P11D. Errors here tend to surface at year end and create avoidable catch-up work. With the expanded list of qualifying reimbursements from April 2026, it’s worth making sure you know which benefits sit inside the exemption and which still need reporting.
Finance Act 2026: HMRC’s penalties have more teeth
The Finance Act 2026 introduced and strengthened penalty provisions covering three specific areas that are directly relevant to PAYE compliance: failing to comply with HMRC notices, concealing information, and providing inaccurate information.
None of this is new in spirit — HMRC has always had the power to penalise non-compliance — but the formalisation of these provisions signals an intent to enforce more actively. Employers who have relied on a degree of informality in their payroll records, or who have taken a relaxed view of what needs to be reported and when, face a higher-risk environment than they did a year ago.
The practical implication is not that you need to be anxious about every payroll run. It is that the margin for casual errors is narrowing. A genuine mistake, well-documented and corrected promptly, is treated very differently by HMRC than a pattern of errors or a failure to respond to a compliance notice. The difference comes down to record-keeping and responsiveness — both of which are entirely within your control.
If you’ve received any correspondence from HMRC about your PAYE account and haven’t acted on it, that is worth addressing as a priority. Ignoring a notice, even inadvertently, is exactly the kind of failure the new provisions are designed to penalise.
Our take
PAYE doesn’t have to be complicated, but it does require consistency. The April 2026 changes are manageable for most small employers — updating your rates, reviewing which benefits are now tax-free, and making sure RTI submissions are going out on time will cover the majority of what’s changed.
Where we see businesses come unstuck is not usually in the big dramatic errors, but in the accumulation of small habits: submitting RTI a day late, running a contractor through the books when they should be on payroll, or assuming a benefit doesn’t need reporting because it never came up before.
If your payroll setup has grown organically as your business has grown — and you’ve never really sat down and stress-tested it — that’s something we help clients with regularly. Getting it right at the foundations saves a lot of remedial work later. If that sounds like your situation, we’re happy to take a look.
Common questions about PAYE
When do I need to register as an employer with HMRC?
You need to register with HMRC as an employer before your first payday if you’re paying an employee at or above the Lower Earnings Limit, or if you’re taking on a second job yourself. Registration can take up to five working days, so it’s worth doing this before you need to run your first payroll rather than at the last minute.
What happens if I submit an RTI return late?
HMRC will issue an automatic penalty, which ranges from £100 to £500 per late submission depending on the number of employees on your payroll. Persistent late submissions attract further scrutiny. HMRC does have a reasonable excuse process, but it’s a much cleaner outcome to file on time in the first place.
Do the April 2026 NMW changes apply to all staff?
New National Minimum Wage rates applied from 1 April 2026 and cover all eligible workers, including part-time, casual, and zero-hours employees. The rate that applies depends on the worker’s age. It’s your responsibility as the employer to ensure the correct rate is being paid — HMRC does check, and underpayment can result in penalties and public naming.
Can I reimburse employees for homeworking costs tax-free in 2026?
Yes, but only if you are making a formal reimbursement for qualifying equipment and the conditions set out by HMRC are met. The option for employees to claim tax relief on non-reimbursed homeworking expenses themselves was removed from 6 April 2026. If your employees were relying on that relief previously, they will need to be reimbursed by you to receive any tax benefit going forward.
What’s the difference between payrolling benefits and a P11D?
Both are ways of reporting employee benefits in kind to HMRC, but payrolling benefits means the tax is collected through PAYE in real time, whereas a P11D is an annual return filed after the tax year ends. Payrolling benefits is generally simpler for employees and avoids a lump-sum tax adjustment. From April 2026, HMRC has been encouraging a move toward payrolling, though P11D reporting remains available.