Employment Rights Act 2025: Payroll, HR and Employee Benefits Update

Employment Rights Act 2025, Payroll, HR & Employee Benefits Update

August 2026

As summer draws to a close, employers continue to navigate a busy period of legislative reform, evolving workplace practices and increasing pressure on benefit and healthcare budgets.

This month’s update highlights key HR, employee benefits and payroll developments that could impact your organisation over the coming months and years.

HR

Employment Rights Act 2025 – Key Updates for Employers

The UK Government has published an updated implementation timetable for the Employment Rights Act 2025 and the wider “Plan to Make Work Pay” reforms. Several significant changes are already in force, with further measures due later in 2026 and throughout 2027.

Changes Already in Force

1. Statutory Sick Pay (SSP)

• SSP is payable from the first day of sickness absence.
• The Lower Earnings Limit has been removed.
• More workers are now eligible for SSP.

2. Day-One Family Leave Rights

Employees are now entitled to:

• Paternity Leave from day one of employment.
• Unpaid Parental Leave from day one of employment.

3. Enhanced Whistleblowing Protection

Workers who raise concerns relating to sexual harassment now benefit from strengthened whistleblowing protection.

4. Increased Collective Redundancy Penalties

The maximum protective award for failing to properly consult in collective redundancy situations has increased from 90 days’ pay to 180 days’ pay per affected employee.

5. Holiday Pay and Leave Record Keeping

Employers are now required to maintain adequate records relating to annual leave and holiday pay and retain them for six years.

Records should include:

• Annual leave entitlement
• Leave taken
• Carry-over arrangements
• Holiday pay calculations
• Payments in lieu of leave where applicable.

Fair Work Agency

The Government has established the Fair Work Agency to strengthen enforcement of employment rights. The agency is intended to support compliance and enforcement across several areas of employment law.

Further Changes Expected During October 2026

Sexual Harassment Duties

The Government intends to introduce:

• A requirement for employers to take “all reasonable steps” to prevent sexual harassment.
• New obligations relating to third-party harassment.

Trade Union Reforms

Further measures expected include:

• A duty to inform workers of their right to join a trade union.
• Enhanced trade union access rights.
• Continued simplification of trade union recognition procedures.

Changes to Tipping Rules

The Government has published an updated draft Code of Practice to reflect the new obligations introduced by ERA 2025.

From October 2026 employers will be required to:

• Consult with recognised trade unions or elected employee representatives (or employees directly where no representatives exists) when creating a tipping policy.
• Re-consult whenever the policy is reviewed which must be at least every three years.
• Provide workers with an anonymised summary of the consultation.

Employers are expected to fully consider any employee views raised during the consultation but are not required to adopt every suggestion made.

Practical impact for employers: Businesses that distribute tips will need a formal consultation process, documented records and regular policy reviews, making employee engagement a fundamental part of demonstrating compliance and fairness in tip allocation.

ACAS Code of Practice Consultation

Proposed Changes to the ACAS Code of Practice on Disciplinary and Grievance Procedures

ACAS launched a consultation on 30 July 2026 on a revised Code of Practice on Disciplinary and Grievance Procedures, representing the first full review of the Code since 2009.

The draft Code places significantly greater emphasis on the early and informal resolution of workplace concerns, moving informal resolution from guidance in the foreword into the main body of the statutory Code.

This is particularly important because Employment Tribunals may take compliance with the Code into account when considering compensation adjustments of up to 25%.

Other proposed changes include requiring disciplinary and grievance correspondence to explain what informal steps have been taken (or why they have not been appropriate), introducing stronger safeguards around the use of suspension by requiring employers to consider whether it is genuinely necessary, extending the Code’s language from “employees” to “workers”, and adding new expectations around reasonable adjustments, mediation, facilitated conversations and manager capability.

The consultation remains open until 23 September 2026 and employers should monitor developments, as the final Code is likely to require updates to disciplinary and grievance procedures, manager training and template documentation.

Looking Ahead to 2027

Unfair Dismissal Reform

Government guidance indicates that unfair dismissal protections are expected to change from January 2027, with proposals including:

• A shorter qualifying period.
• Removal of the current compensatory award cap.

Zero-Hours and Low-Hours Contract Reform

Expected following consultation:

• Right to guaranteed hours based on actual working patterns.
• Compensation for cancelled or changed shifts.
• Enhanced notice requirements for shifts.

Grievances in the World of AI

With the growing use of AI, we are seeing more and more grievances that are either generated or heavily assisted by AI tools.

These grievances are often lengthy, full of legal jargon and difficult to interpret and investigate effectively. They also come with a significant risk that employees may input confidential or commercially sensitive information into external AI systems without fully understanding how that information is stored or processed.

It’s also important to highlight the risks of using AI in dealing with grievances. While it may be tempting for managers to input grievances, notes and any other supporting documents into systems like Co-Pilot to summarise documents, reach outcomes and ultimately save time in dealing with grievance (or any other ER issues), this may risk rendering any decision process unfair.

Disciplinary and grievance processes require the employee to know who is responsible for decision making and any decisions need to be justified by the individual making it.

If a manager has relied on a decision generated by AI or even relied on AI generated content when making that decision, the employee may legitimately challenge this as unfair.

With this in mind, we are currently reviewing grievance policies to allow for greater protection against the risks of using AI. In addition having an AI policy should be a priority and please reach out to us if you want us to provide one.

Employee Benefits

Pensions

The £2,000 Salary Sacrifice Cap

An annual £2,000 cap on National Insurance savings for pension salary sacrifice will come into force in April 2029.

Salary Sacrifice remains uncapped for now. Employers have a 3 year window to encourage contributions and maximise NI savings for both the business and employees before the £2,000 ceiling applies.

Private Medical Insurance

Workplace PMI Hits a 30 Year High

With UK medical Inflation sitting around 10-12% employers are feeling the squeeze.

Persistent NHS waiting lists mean employees are relying on workplace healthcare more than ever – which is great for productivity, but can trigger steep premium jumps at renewal times.

To keep healthcare benefits sustainable without cutting cover, forward-thinking employers are rethinking how their benefits are structured, communicated and accessed.

Here are just some practical ways to manage PMI costs.

Be Transparent With Your Team

Many employees treat PMI without any thought and are unaware that high claims directly drives up the company renewal premiums.

What can be done – be transparent with your team. Help employees understand that PMI is an insurance policy much like your car or home insurance. Education that PMI might not always be the first port of call for everyday support. Clear communication builds a culture of shared responsibility, protecting the benefit for everyone in the long run.

Signpost Low Cost Pathways First

One of the fastest ways to inflate PMI renewals is through high frequency, low cost claims, such as short course mental health or routine physiotherapy.

What can be done to help employees divert their everyday healthcare needs:

• Employee Assistance Programmes – Ideal for 6-8 sessions of confidential counselling or mental health support.
• Health Cash Plans –-Perfect for dental, optical, prescriptions and initial physio or chrio treatments.

Generally, these services are either fixed costs or pooled differently, meaning an employee can get rapid support without touching the company’s PMI claims history or impacting next years premium.

Review Your Scheme Design

Traditionally, many businesses reserved PMI for senior management or executives. However, small, older executive risk pools tends to experience higher claim severity, leading to volatile premium spikes.

To help support this you can explore opening up healthcare options to the whole workforce. By bringing in a wider, typically younger and healthier demographic into your scheme dilutes the overall risk pool.

Combined with modern tired or modular PMI designs, extending access can stabilize per head costs while eliminating the us vs them divide in workplace perks.

Payroll

Encourage Employees to Check Their HMRC Online Tax Account

We recommend encouraging your employees to set up and regularly access their HMRC online tax account.

This enables them to:

• View the information HMRC holds about their employment and income.
• Understand how their tax code has been calculated.
• Check that their personal details are correct and up to date.
• Identify and resolve any discrepancies before they result in unexpected tax adjustments.

Employees who actively manage their online tax account are often better informed about changes affecting their tax position, reducing payroll queries and helping to ensure tax codes are accurate.

P11D Reminder – Why Your Employees May Not Receive One

Following the completion of the 2025/26 P11D reporting season, we have received a number of queries from employees expecting to receive a P11D.

If your business has been payrolling benefits since 6 April 2025, employees will not receive a P11D for those payrolled benefits.

This is because the tax has already been collected through payroll throughout the tax year, removing the need for a separate P11D.

We recommend reminding your employees of this change if they contact you requesting a copy of their P11D.

Instead, they should refer to their payslips and, where appropriate, their HMRC online tax account to understand how their benefits have been taxed.

A P11D will only have been issued where a benefit could not be payrolled, such as employer-provided living accommodation or beneficial loans.

Changes Coming to Employee Benefits

A reminder that from 6 April 2027, there will be changes to how employers report taxable employee benefits.

Benefits such as company cars, private medical insurance and other taxable perks will need to be processed through payroll during the year, rather than being reported separately after the year end.

If you provide employee benefits, now is a good time to review your current arrangements and make sure your payroll processes and systems are ready for the change.

Tips and Gratuities – Changes from October 2026

From October 2026, the tax treatment of tips and gratuities will change significantly, with employers taking on greater responsibility for reporting and deducting tax.

Current Position

Under the current rules:

• Employers only operate PAYE on tips that they pay directly to employees through payroll.
• Tips distributed through an independently operated tronc arrangement are subject to Income Tax but are generally not processed through the employer’s payroll. Where the tronc is genuinely independent, employers are not responsible for operating PAYE on those payments, and employer National Insurance Contributions are not due.
• Cash tips paid directly from customers to employees remain the employee’s responsibility to declare to HMRC.

From October 2026

Under the new rules:

• Employers will be responsible for operating PAYE on all qualifying tips that they collect, allocate or distribute, including those paid through tronc arrangements where the employer has any involvement.
• These payments will need to be reported through Real Time Information (RTI) as part of the payroll process.
• Income Tax will be deducted at source, creating a more consistent approach to the taxation of tips.
• The National Insurance treatment of tips will also change, meaning employers should review the potential impact on payroll costs and administration.

What Should Employers Do Now?

Although October 2026 may seem some time away, businesses should begin preparing now by:

• Reviewing how tips are currently collected and distributed.
• Assessing whether existing tronc arrangements will remain suitable.
• Discussing any required payroll software or process changes with their payroll provider.
• Budgeting for any additional payroll administration.

These changes are expected to have the greatest impact on employers in the hospitality, leisure, hair and beauty, and other customer-facing sectors where tipping forms a regular part of employee earnings.

We will continue to monitor HMRC guidance and keep you informed as further details become available, helping you prepare well in advance of the new requirements.

If you would like to get in touch in the meantime please reach out using the following details below:

📩 – enquiries@blackmountainhr.com

📞 – +44(0)1432 272787

🖥️ – www.blackmountainhr.com/contact

Relevant sources can be found on.GOV – https://www.legislation.gov.uk/ukpga/2025/36