Employment & Payroll

In general, entertaining employees is an exception to the normal rule that business entertainment costs are not allowable for tax purposes. If an employer provides entertainment exclusively for employees and it is “wholly and exclusively for the purposes of the trade”, then the expenditure is allowable as a business deduction. Examples include a staff Christmas party, or a sporting event open only to employees.

It is important that the entertainment is not merely incidental to hospitality provided for customers. The definition of employees accepted by HMRC can extend to retired staff and the partners of existing and past employees.

Although the expenditure is allowable, the employees themselves may have to pay tax on the entertainment received and the employer will have to report this on form P11D. To counter this, many employers choose to include such items in a PAYE Settlement Agreement (PSA) and pay Income Tax and National Insurance contributions on behalf of the employees

Proper record keeping is important to be able to demonstrate where legitimate staff entertainment has taken place. Care should be taken to ensure that staff entertaining is reasonable, as excessive entertainment could lead to a tax charge for employees even if the employer’s costs have been disallowed (in whole or in part).

Setting up the correct tax code when a new employee starts is essential, as even small payroll errors can lead to unnecessary tax overpayments and avoidable complications later on.

When hiring a new employee, employers need to ensure the correct tax code and starter declaration are set up in their payroll system. Using the wrong tax code can cause the employee to overpay taxes, so accurate information is essential. Much of this information is provided on the employee’s P45, so it is important to remind new employees to bring it on their first day.

If the employee does not have a P45, they can complete HMRC’s online PAYE starter checklist. A paper version is also available if they cannot access the online tool. Employers must retain this information in their payroll records for the current tax year and the following three years. Once completed, HMRC’s online tools can be used to determine the correct tax code.

The starter checklist should be used in cases where the employee:

• Has a student or postgraduate loan
• Has personal details that differ from their P45
• Does not have a P45
• Is temporarily working in the UK for an overseas employer

Once completed, the checklist can be submitted to the employer by email, post, or in person. There is no need to send it to HMRC.

From 6 April 2026, significant changes to PAYE rules will affect umbrella companies, recruitment agencies, and end clients, increasing shared responsibility for payroll compliance across labour supply chains.

Umbrella companies are often used by freelancers, contractors, and temporary workers who prefer not to operate as limited companies or set up their own businesses. Essentially, an umbrella company acts as an intermediary between the worker and the end client (or recruitment agency), handling payroll, taxes and other administrative tasks on behalf of the worker. This includes any business supplying labour under a contract of employment.

There are significant changes to the PAYE rules for labour supply chains taking effect from 6 April 2026. Under the new rules, if an umbrella company fails to operate PAYE correctly or underpays tax and NICs, HMRC can recover the amounts due from the recruitment agency that has the contract with the end client, rather than pursuing only the umbrella company. Where there is no recruitment agency involved, the end client becomes responsible. This significantly widens the requirement for all parts of the labour supply chain to ensure that these umbrella companies are fully compliant with all payroll obligations.

Umbrella companies still remain the legal employer of the workers, but recruitment agencies and end clients will now share responsibility for ensuring PAYE is operated correctly from April 2026 onwards.

Providing the right information when you start a new job helps ensure your tax code is correct from the first pay day and avoids the risk of paying too much tax.

When starting a new job or taking on additional employment, your new employer will usually send your income details to HMRC, which are used to calculate your tax code. If this information is not provided in time, or you choose not to share it, you may be placed on a temporary emergency tax code.

To avoid this, you should provide your new employer with your P45. If you do not have a P45 or do not wish to supply it to your new employer then you should complete HMRC’s starter checklist.

You can check your employment details via HMRC’s online services or mobile app, ensuring only one employer is using the standard 1257L tax code and that your estimated income is accurate. This should be available to view within 6 weeks after your first pay day.

If your records are incorrect or incomplete, you can update your employer details, add or remove employers and amend your estimated income or benefit information directly with HMRC. These updates can help prevent underpayment or overpayment of tax.

These changes may or may not affect your tax code. If the changes result in a change, HMRC will notify your employer.

From 6 April 2026, new tax rules will expand workplace benefits relief. The changes will simplify the treatment of certain low-value workplace benefits-in-kind (BIKs), affecting both employers and employees.

The changes extend existing exemptions for eye tests, flu vaccinations and home working equipment to include reimbursements, aligning them with current provisions for direct supply.

Under current law, employers can provide these benefits tax-free, but reimbursements were excluded. The upcoming changes will ensure that reimbursed expenses for eye tests, flu vaccines and home office equipment are treated the same as where the employer provides the benefit directly for Income Tax and National Insurance purposes.

These changes aim to streamline the tax system, reduce administrative burdens and better reflect modern working practices. Employees will benefit by being able to claim reimbursements for minor work-related costs without tax or National Insurance implications.

The Chancellor of the Exchequer, Rachel Reeves announced increases to the Minimum Wage rates on the eve of the Budget. The Chancellor confirmed that the government has accepted in full the proposals of the Low Pay Commission (LPC) for increasing minimum wage rates from 1 April 2026.

The National Living Wage (NLW) rate will increase from £12.21 to £12.71 on 1 April 2026 and represents an increase of 50p or 4.1%. The NLW is the minimum hourly rate that must be paid to those aged 21 or over. The increase represents a pay rise of £900 a year for someone working full-time and earning the NLW.

It was also announced that the National Minimum Wage (NMW) – for 18-20 year olds – will increase from £10.00 to £10.85 an hour. This is an 8.5% increase and will see younger workers having their pay boosted by up to £1,500 next year. This increase is part of moves to narrow the gap in wage rates for 18-20 years olds and the NLW and ultimately create a single adult wage rate for all those aged 18 and up.

The NMW rates for 16 to 17 years old will increase from £7.55 to £8.00 – an increase of 45p or 6% per hour – from next April. The Apprentice Rate will mirror this increase in line with earlier recommendations by the LPC.

At the Budget, the government also announced two new measures aimed at supporting young people’s employment and skills development.

1. The Youth Guarantee: Jobs Guarantee Scheme will provide a six-month paid work placement for eligible 18-21 year group, who have been on Universal Credit and searching for work for at least 18 months. This scheme will cover 100% of employment costs for 25 hours a week at the minimum wage, alongside other support measures.
2. The Youth Guarantee and Growth and Skills Levy will allocate more than £1.5 billion over the spending review period to improve employment and skills support. This funding will help ensure that young people have access to high-quality training opportunities and streamline the apprenticeship system to make it more efficient.

If you use your own money to buy items for work, you may be eligible to claim tax relief as long as the items are essential for your job and are used solely for work purposes.

Flat rate expenses (also known as a flat rate deduction) allows you to claim tax relief for a fixed amount each tax year to cover the costs of work clothing and tools required for your job. This tax relief reduces the amount of tax you owe. For example, if you claim a flat rate expense of £60 and pay tax at a 20% rate, you will pay £12 less in tax. When claiming a flat rate expense, there is no need to provide receipts.

A claim for flat rate expenses can be made on HMRC’s portal at www.tax.service.gov.uk/claim-tax-relief-expenses/what-claiming-for. You need to make your claim under the heading ‘Uniform, work clothing and tools (Flat rate expenses)’ in the portal mentioned above. If your employer pays towards your expenses, you must deduct the amount they pay to get the figure you can claim.

HMRC publishes a table entitled ‘Lists of industries and jobs’. The table lists the tax relief you can claim by category. For example, workers in the forestry sector can claim a flat rate expense of £100 and airline cabin crew £720. If your industry or job is not listed, you can claim a flat rate expense of £60 for each applicable tax year.

This tax relief is designed to support employees with essential job-related costs, so it’s worth checking if you are eligible to claim. There is also an option to claim the actual amount you have spent. You will need to provide receipts or proof of purchase if you use this method.

The Department for Business & Trade has recently published a report that outlines the government’s enforcement of the National Minimum Wage (NMW) and National Living Wage (NLW) for the 2024–25 financial year.

The Government is committed to ensuring that all workers receive the minimum wage to which they are entitled, and HMRC enforces this on its behalf through a strategy known as ‘Promote, Prevent and Respond’.

The ‘Promote’ strategy aims to address non-compliance due to lack of understanding rather than deliberate underpayment, focusing on improving information for employers so they can meet their legal obligations. If employers continue to neglect compliance, full enforcement actions are taken.

The ‘Prevent’ strategy targets employers who intentionally underpay workers, by highlighting the consequences of non-compliance to deter such behaviour.

The ‘Respond’ strategy comes into play when HMRC identifies non-compliance, either through worker complaints or its targeted enforcement activities. If an employer is found to have underpaid workers, HMRC issues a Notice of Underpayment (NoU), requiring the employer to repay the wages within 28 days and imposing penalties. Serious cases may result in a labour market enforcement undertaking (or order). In the most serious cases criminal prosecution can also be pursued by HMRC.

The budget for enforcement increased from £31.2 million in 2023-24 to £31.5 million in 2024-25, enabling HMRC to expand its compliance team and increase its investigative efforts to improve wage compliance and protect workers’ rights.

As a reminder, the current NMW and NLW rates took effect on 1 April 2025. The current hourly rate for the NLW is £12.21. For those aged 18 to 20, the NMW is £10.00 per hour. Workers aged 16 to 17 and apprentices are entitled to £7.55 per hour.

Employees who need to buy equipment to use as part of their employment may be able to claim tax relief based on the cost of the equipment acquired. In most cases you can claim tax relief on the full cost of this type of equipment as it usually qualifies for a type of Capital Allowance called annual investment allowance. Any tax relief would be reduced if the employer provides a contribution towards buying the item.

The way to claim tax relief depends on the amount you’re claiming. HMRC provides the following information on making a claim:

Claims up to £2,500

You should make your claim:

• using a Self-Assessment tax return if you already fill one in
• online or by printing and posting form P87 if you don’t already fill in a tax return 
• by phone if you’ve had a successful claim in a previous year and your expenses are less than £1,000 (or £2,500 for professional fees and subscriptions)

Claims over £2,500

• You can only claim using a Self-Assessment tax return. You will need to register if you don’t already complete a return.

There are different rules for employees who use their own uniforms, work clothing and tools for work. It is possible to claim for the cost of repairing or replacing small tools you need to do your job (for example, scissors or an electric drill), or cleaning, repairing or replacing specialist clothing (for example, a uniform or safety boots). A claim for valid purchases can be made against receipts or as a 'flat rate deduction'. However, an employee cannot claim relief on the initial cost of buying small tools or clothing for work.

If you do not receive compensation from your employer you can still claim tax relief for some expenses that result from home working. HMRC will usually allow you to claim tax relief if you use your own money for things that you must buy for your job and you only use these items for work. You must make a claim within 4 years of the end of the tax year that you spent the money.

For example, if you use your own uniforms, work clothing and tools for work. It is possible to claim for the cost of repairing or replacing small tools you need to do your job as an employee (for example, scissors or an electric drill), or cleaning, repairing or replacing specialist clothing (for example, a uniform or safety boots). A claim for valid purchases can be made against receipts or as a 'flat rate deduction'. However, you cannot make a claim for relief for the initial cost of buying small tools or work clothing.

You may also be able to claim tax relief for using your own vehicle, be it a car, van, motorcycle or bike. As a general rule, there is no tax relief for ordinary commuting to and from your work. The rules are different for temporary workplaces where the expense is usually allowable and if you use your own vehicle to do other business related mileage.

Note, that if you have agreed with your employer to work at home voluntarily, or you choose to work at home, you cannot claim tax relief on the bills you have to pay.