The start of a new tax year is fast approaching, and this is a good time to explain what makes up a tax code and to take a look at the changes that will be in place from April 2026

Tax Codes

In the UK, if you are paid under a PAYE scheme you will be allocated a personal tax code, most tax codes are a combination of numbers and letters.

The number is used to work out how much tax-free pay an employee can earn in each tax year before they start paying tax.  Currently, the standard tax-free Personal Allowance is £12,570 which would show as tax code 1257L (the tax allowance is the tax code number x 10).  Although there is a standard allowance this can vary due to a person’s personal circumstances.

The letters are providing information to an employer of a specific personal allowance, some examples regularly in use below:

L           Entitled to the full personal allowance
M         10% of individual partner’s personal allowance has been transferred across.
N         The reverse of the above, individual has transferred the 10%
T          The tax code considers other calculations to work out the personal allowance.
NT       No tax is being paid
BR       Stands for basic rate, all income taxed at 20%
DO       All income taxed at 40%
D1       All income taxed at the additional rate of 45%.  Applies to income over £125,140
K         If you have a tax code pre-fixed with a K, this usually means that HMRC are recovering tax owed.

Another consideration is if there is a W1/M1 of just ‘X’ suffix on a tax code.  This means that tax will only be calculated on the payment being processed in the current period, it does not consider any tax already paid since 6^th April.

Overview Of changes

Several key changes to payroll regulations in the UK are set to take effect from April 2026. The main areas that will be impacted are the current statutory payments and minimum wage rates.

Below is an overview of the changes for 2026/27 and how they may affect both you as employers and your employees.​

1. Changes to National Insurance Rates

For Employers:

•  No Change to Rate: From 6 April 2026, the employer’s NIC rate will remain 15% on earnings above the secondary threshold. ​
• Secondary Threshold No Change: The threshold at which employers start paying NICs will remain at £5,000 per annum (£96 per week / £417 per month) and will remain at this level until 5 April 2028.

For Employees:

• The main employee Class 1 National Insurance (NI) rate remains at 8% on earnings between £12,570 and £50,270 per year (£242–£967 per week / £1,048 – £4,189 per month).
• A reduced rate of 2% applies to earnings above £50,270.  
• Employees will not pay NICs on earnings under the Primary Threshold of £12,570 per year (£242 per week / £1,048 per month).

2. Employment Allowance

• ​ The Employment Allowance, which allows eligible businesses to reduce annual National Insurance liability, will remain at £10,500.

3. Changes to Statutory Sick Pay (SSP) and Statutory Rates

From 6 April 2026 there is a significant change to Statutory Sick Pay (SSP).  The removal of the Lower Earnings Limit and abolishing the three-day waiting period means that all employees will now be eligible to SSP from the first full day of sickness.

SSP will be paid at 80% of an employee’s average weekly earnings or a weekly flat rate of £123.25, whichever is the lower amount.  The maximum number of weeks that SSP can be paid will remain at 28 weeks.

These changes while providing employees with more protection, will have a major impact on payroll costs for employers, particularly for businesses with part-time, low-paid, or casual staff.  The government offer no rebate for these payments.

Steps that Employers should take.

• Update employment contracts, company sickness absence policies and company handbooks to reflect the changes to SSP and the entitlement from day one of sickness.
• There is a higher risk of short-term absenteeism, therefore HR policies on sick pay, return to work procedures and tracking and monitoring absences will need reviewing and updating.

Advo have a dedicated HR Team who will be able to offer help, and advice should you require assistance.

Statutory Maternity, Paternity, Adoption, Shared Parental, Parental Bereavement and Neonatal Care Pay will increase to £194.32 per week or 90% of the employee’s average weekly earnings, whichever is lower.

4. National Living Wage (NLW) and National Minimum Wage (NMW) Increases

To support lower-paid workers, the government has announced increases to the NLW and NMW rates from 1 April 2026:​

• National Living Wage (for workers aged 21 and over): Increased from £12.21 to £12.71 per hour, a 4.1% rise.
• 18 to 20-Year-Old Rate: Increased from £10.00 to £10.85 per hour, marking an 8.5% rise. ​
• 16 to 17-Year-Old and Apprentice Rate: Both increased from £7.55 to £8.00 per hour, an 6% increase.

The Common Causes of NMW Underpayment:

• Unpaid Working Time:  Unpaid working hours such as staying late, arriving early, attending mandatory meetings or training and unpaid travel time between jobs could push an employee’s average hourly earnings below the legal minimum.
• Deductions from Pay: Deducting money for uniforms, tools or other expenses related to the job can reduce the pay below the NMW rate.
• Salary Sacrifice Schemes: Schemes like childcare vouchers or cycle-to-work are often applied incorrectly, which can cause an employee’s pay to fall below the minimum wage.
• Failure to Increase Rate: Failure to increase pay after a birthday (reaching a new age bracket) or after completing an apprenticeship can cause an underpayment.
• Unpaid Overtime/Extra Hours: Failing to pay for extra hours worked, particularly for salaried employees who work beyond their contracted hours.
• Apprentice Rate Errors: Failing to pay the correct rate, particularly when an apprentice moves into their second year or hits age 19, which changes their entitlement.

Consequences for Employers:

HMRC can fine companies up to 200% of the unpaid wages, up to a maximum of £20,000 per employee.  Employers must also pay back all arrears to employees that were underpaid.

The government will publish the names of employers who fail to pay the minimum wage.  Recently a total of around £12.6 million in penalties were issued to 389 employers, including some well-known brands, for failing to pay the minimum wage.

The payroll team at Advo are here to support and advise and help you to avoid some of the pitfalls mentioned.  Please do contact us if you need further information on the changes.

Article written by Mel Spice, Advo Payroll Adviser