How does UK payroll tax work in 2026?

Employment Allowance

Eligible employers can offset up to £10,500 of their annual Class 1 NIC bill via the Employment Allowance. For a small or mid-sized UK Ltd, this can wipe out most of the NIC liability on the first £70,000 of payroll above the secondary threshold. Eligibility excludes single-director limited companies where the director is the only employee.

Apprenticeship Levy threshold

If your annual pay bill exceeds £3 million, you pay 0.5% Apprenticeship Levy on the excess above £15,000. For a mid-market business hiring through Teamed’s EOR, the Levy typically triggers around 40–50 UK employees on average tech salaries. The levy can be drawn down for apprenticeship training within 24 months.

Class 1 NIC is calculated on a weekly/monthly basis matching the payroll cycle, not annually. This matters for irregular earners (commission, bonuses), a one-off £20,000 bonus is taxed differently from £20,000 spread evenly across the year.

Self-employed NIC (Class 2 and Class 4) is different and outside scope here. Class 2 was substantially restructured for 2024–25 onwards; Class 4 sits at 6% between thresholds.

The £100,000 personal-allowance taper

Above £100,000 of adjusted net income, the personal allowance tapers at £1 lost for every £2 earned. By £125,140 (the upper end of the higher-rate band) the personal allowance is fully gone. This creates an effective marginal rate of 60% between £100,000 and £125,140, UK’s most aggressive marginal cliff. Workers in this band have strong incentives to salary-sacrifice into pension (which doesn’t count toward adjusted net income).

Scottish income tax

Scottish-resident taxpayers face different bands and rates under the Scottish Rate of Income Tax. The bands and rates diverge meaningfully from rUK at higher earnings. Teamed’s payroll applies the correct code based on the employee’s residence-determined tax code.

The RTI submissions an employer must file:

• FPS (Full Payment Submission), on or before each payday, for every employee paid
• EPS (Employer Payment Summary), monthly if claims (e.g. Employment Allowance) or no FPS that period
• EYU (Earlier Year Update), correction submissions for prior years if needed

Penalties for late RTI:

The penalty regime stacks. A small employer missing three monthly RTI deadlines incurs £300 in pure penalties before any interest on unpaid tax.

Teamed’s payroll service runs all four document types end-to-end. Clients see the outputs but don’t need to administer them.

Operationally:

• Eligible jobholders (22+, earning over £10,000) are auto-enrolled on day one of eligibility
• Non-eligible jobholders (e.g. 16–21 earning over £6,240, or 22+ earning £6,240–£10,000) can opt in and receive employer contributions
• Entitled workers (16+ earning below £6,240) can join the scheme but don’t receive employer contributions

Workers can opt out within the first month and receive a refund of contributions. After that month, opting out is a one-way change that requires a fresh enrolment three years later (the “re-enrolment” cycle).

Qualifying scheme requirements

The scheme Teamed uses is a UK-qualifying defined-contribution scheme, typically NEST, Smart Pension, or similar, with the regulatory features The Pensions Regulator requires. Contributions are tax-relieved at source for employees, which means the gross contribution is paid into the pension and the employee’s payslip shows a smaller deduction.

Repayment thresholds and rates for 2025–26:

The employee’s tax code includes a “Plan” indicator that drives the correct deduction in PAYE. New starters often arrive without their plan correctly mapped on their P45, Teamed’s onboarding form collects the data and applies the right code from day one to avoid retrospective corrections.