UK employment law changes in 2025: what small businesses need to know

Published Monday 11 May 2026

Table of contents

• Understanding the Employment Rights Act 2025
• Changes already in effect (April 2026)
• National minimum wage and national living wage updates
• Neonatal care leave and pay
• Upcoming changes in October 2026
• Changes from January 2027
• Further reforms expected in 2027
• Flexible working and the right to disconnect
• How to prepare for the employment law changes
• Compliance checklist for UK employers
• Stay on top of employment law with Xero
• FAQs on UK employment law changes

Key takeaways

• The Employment Rights Bill received Royal Assent on 18 December 2025, becoming the Employment Rights Act 2025. Changes are rolling out in phases from April 2026 through to 2027, so you'll need to plan ahead for each stage.
• From April 2026, Statutory Sick Pay (SSP) starts from day one with no waiting period, paternity and parental leave become day-one rights, and the new Fair Work Agency begins operating.
• Unfair dismissal protection will apply after six months of employment from January 2027, replacing the current two-year qualifying period, giving your new hires stronger protections sooner.
• Employer National Insurance contributions (NICs) rose from 13.8% to 15% in April 2025, alongside increases to the National Living Wage, so you should review your payroll budgets now.

Understanding the Employment Rights Act 2025

The Employment Rights Act 2025 is the most significant overhaul of UK employment law in a generation. The Bill received Royal Assent on 18 December 2025, marking the formal start of wide-ranging reforms that affect how you hire, manage, and support your employees.

The Act forms part of the government's Make Work Pay initiative, which aims to improve job quality and strengthen protections for workers across the UK. Rather than taking effect all at once, the changes are being introduced in phases: April 2026, October 2026, January 2027, and further into 2027.

A central element of the Act is the creation of the Fair Work Agency (FWA). This new enforcement body brings together existing agencies responsible for enforcing minimum wage, employment agency standards, and other workplace rights. The FWA will have the power to investigate and penalise non-compliant employers, so it's worth familiarising yourself with the Employment Rights Act factsheets on GOV.UK.

Changes already in effect (April 2026)

Several major provisions of the Employment Rights Act 2025 came into force on 6 April 2026. These changes directly affect how you manage sick pay, parental leave, and workplace protections.

Here's what's now in place:

• SSP from day one: employees no longer need to wait three days before receiving Statutory Sick Pay, and the lower earnings limit has been removed. This means all employees qualify from their first day of illness, regardless of how much they earn.
• Paternity and parental leave as day-one rights: new employees can now take paternity leave and unpaid parental leave from their first day on the job, with no qualifying period.
• Whistleblowing protections for sexual harassment: reporting sexual harassment in the workplace is now specifically protected under whistleblowing legislation.
• Collective redundancy protective award doubled: the maximum protective award for failure to consult on collective redundancies has increased from 90 to 180 days' pay.
• Trade union recognition simplified: the process for statutory trade union recognition has been streamlined, making it easier for workers to organise.
• Holiday record-keeping requirements: you're now required to maintain detailed records of your employees' holiday entitlement, leave taken, and remaining balances. If you're setting up these processes for new staff, see the hiring employees checklist for a step-by-step guide.
• Fair Work Agency operational: the FWA is now active, consolidating enforcement of employment rights and investigating non-compliance.

National minimum wage and national living wage updates

The UK government increased minimum pay rates from April 2025. If you employ staff at or near the minimum wage, you need to make sure your payroll reflects the current rates.

The rates from April 2025 are:

• National Living Wage (21 and over): £12.21 per hour
• National Minimum Wage (18 to 20): £10.00 per hour
• National Minimum Wage (16 to 17 and apprentices): £7.55 per hour

You can check the latest rates on the GOV.UK national minimum wage page. Underpaying staff can lead to penalties of up to 200% of the arrears owed, public naming by HMRC, and potential criminal prosecution for serious or repeated offences.

Alongside the wage increases, employer National Insurance contributions (NICs) rose from 13.8% to 15% in April 2025. The secondary threshold, the point at which you start paying NICs on an employee's earnings, also dropped from £9,100 to £5,000. Together, these changes increase your employment costs, so it's worth reviewing your payroll budgets and pricing to stay on track. For a detailed look at how deductions and reporting work, see the guide on how to pay employees.

Neonatal care leave and pay

Neonatal care leave and pay became available from 6 April 2025. If your employee's baby requires neonatal care within 28 days of birth, they can take up to 12 weeks of additional leave on top of their existing maternity or paternity entitlement.

This right is available from day one of employment, with no qualifying period for the leave itself. Both biological and adoptive parents qualify, provided the child meets the neonatal care criteria. You can find full details on the GOV.UK neonatal care leave page.

Statutory neonatal care pay is set at £187.18 per week or 90% of the employee's average weekly earnings, whichever is lower. To qualify for the pay element, employees need 26 weeks of continuous service and earnings at or above the lower earnings limit. Employees must give you notice before each period of leave, though the specific notice requirements depend on whether the leave is taken consecutively or in separate blocks.

Upcoming changes in October 2026

A second wave of reforms takes effect on 1 October 2026. These changes strengthen protections around dismissal, harassment, and workplace rights, and you should start reviewing your policies now.

The key changes coming in October 2026 include:

• Fire and rehire protections: dismissing an employee and rehiring them on less favourable terms will become automatically unfair, except in very limited circumstances where the business can demonstrate financial distress.
• Third-party harassment liability: you'll be liable if a third party, such as a client or customer, harasses your employee and you haven't taken reasonable steps to prevent it.
• Strengthened sexual harassment prevention duty: the existing duty to prevent sexual harassment is being upgraded. You'll need to take "all reasonable steps" to protect employees, rather than just "reasonable steps."
• Tipping law reforms: further regulations will strengthen how tips, gratuities, and service charges must be distributed fairly to workers.
• Employment tribunal time limits extended: employees will have six months to bring a claim to an employment tribunal, doubled from the current three months.
• Trade union access and facilities rights: trade unions will gain new rights to access workplaces and enhanced facilities time for union representatives.
• Industrial action detriment protections: employees will be protected from suffering a detriment for participating in lawful industrial action.

Changes from January 2027

Unfair dismissal protection will apply from day one of employment, but with a statutory probationary period of six months, from January 2027. This is a significant change from the current two-year qualifying period, although the government adjusted its original proposal of full day-one rights to include this initial period.

During the six-month probationary period, a lighter-touch process will apply. You'll still need a fair reason to dismiss someone and must follow a reasonable procedure, but the process won't be as extensive as for established employees. After six months, full unfair dismissal protections kick in.

The government has also confirmed plans to remove the compensatory award cap for unfair dismissal claims in certain circumstances. Currently, the cap is set at the lower of 52 weeks' pay or £115,115. Removing or raising this cap could increase the financial risk of getting dismissals wrong, so it's critical to document your processes carefully.

Further reforms expected in 2027

Additional changes are expected later in 2027, though exact dates haven't been confirmed for all of them. These reforms cover contracts, working patterns, and employer reporting requirements.

The following changes are anticipated:

• Zero-hours contract guaranteed hours: employers will need to offer guaranteed hours to workers on zero-hours or low-hours contracts, based on the hours they regularly work over a reference period.
• Shift cancellation compensation: workers will be entitled to compensation if you cancel, move, or shorten a shift at short notice.
• Flexible working as the default: employers will need to explain their reasons for refusing a flexible working request, with flexible arrangements treated as the default position.
• Bereavement leave: a statutory right to bereavement leave will be introduced, expanding the existing right to parental bereavement leave to cover a wider range of relationships.
• Gender pay gap and menopause action plans: organisations with 250 or more employees will be required to produce gender pay gap action plans and menopause action plans.
• Pregnancy and maternity protections: stronger protections against dismissal during pregnancy, maternity leave, and for a period after returning to work.
• Non-disclosure agreements (NDAs) voided for harassment and discrimination: NDAs that seek to prevent workers from disclosing harassment or discrimination will be unenforceable.
• Collective redundancy cross-establishment threshold: the trigger for collective redundancy consultation will be calculated across the entire business, not per individual workplace.
• Umbrella company regulation: new regulations will bring umbrella companies under closer scrutiny and improve protections for workers engaged through them.

Flexible working and the right to disconnect

Flexible working is already a day-one right. Since April 2024, every employee has been entitled to request flexible working from their first day of employment. Your obligation is to consider each request and respond within two months.

The 2027 reforms will go further, requiring you to explain your reasons for refusing a flexible working request. This shifts the expectation so that flexible arrangements are the default, and you'll need a clear business justification if you turn one down.

The right to disconnect was originally proposed as part of the Employment Rights Bill but was dropped from the final Act. There's no legal obligation for you to implement a right-to-disconnect policy. That said, some employers are choosing to adopt voluntary policies around out-of-hours communication to support employee wellbeing and retention. If you're considering this, Acas has published guidance on employment rights under the new Act that covers best practice around working time and boundaries.

How to prepare for the employment law changes

Preparing now will help you stay compliant as each phase of the Employment Rights Act 2025 takes effect. Here are the practical steps to work through.

1. Review your employment contracts and policies. Check that contracts, handbooks, and written procedures reflect the new day-one rights for SSP, paternity leave, parental leave, and unfair dismissal protection. Update your probationary period clauses to align with the six-month statutory framework. Our guide to payroll compliance covers what records you need to keep.
2. Update your payroll. Make sure your payroll system reflects the April 2025 National Living Wage and National Minimum Wage rates, the removal of the SSP waiting period, and the increased employer NICs rate of 15%. Xero's payroll software can help you stay on top of these changes.
3. Train your managers. Brief line managers on the new rights around unfair dismissal, flexible working, and harassment prevention. They'll need to understand what "all reasonable steps" means in practice and how to handle flexible working requests properly.
4. Budget for increased employment costs. Factor in the higher employer NICs, increased minimum wage rates, and the potential cost of neonatal care leave. Review your pricing and financial forecasts accordingly.
5. Document your flexible working procedures. Set out a clear process for handling flexible working requests, including how you'll record decisions and communicate reasons for any refusals.
6. Strengthen your harassment prevention measures. Review your anti-harassment policies to meet the "all reasonable steps" standard. This includes training staff, setting up reporting channels, and addressing third-party harassment risks.

Compliance checklist for UK employers

Use this checklist to track your progress as the changes take effect.

1. Confirm your payroll reflects the April 2025 National Living Wage and National Minimum Wage rates
2. Remove the three-day SSP waiting period and lower earnings limit from your sick pay processes
3. Update contracts to reflect day-one rights for paternity leave, parental leave, and SSP
4. Introduce a neonatal care leave and pay policy
5. Set up holiday record-keeping that meets the new requirements
6. Review your anti-harassment policies and train managers on the "all reasonable steps" duty
7. Prepare for fire-and-rehire restrictions coming in October 2026
8. Update your dismissal procedures to reflect the six-month qualifying period from January 2027
9. Establish a documented process for handling and responding to flexible working requests
10. Budget for higher employer NICs and plan for any impact on your staffing costs
11. Monitor GOV.UK and Acas for confirmed dates on zero-hours contract reforms and other 2027 changes
12. Consider voluntary policies around out-of-hours communication and employee wellbeing

Stay on top of employment law with Xero

Keeping up with employment law changes means staying organised with your payroll, contracts, and financial planning. Xero's cloud-based accounting and payroll software helps you manage wage updates, track employee costs, and keep your finances in order as regulations change.

With Xero's payroll features, you can process pay runs that reflect the latest statutory rates, manage leave entitlements, and generate reports that give you a clear view of your employment costs. This makes it easier to stay compliant and plan ahead as each phase of the Employment Rights Act 2025 rolls out.

Get one month free and see how Xero can help you manage the changing employment landscape with confidence.

FAQs on UK employment law changes

Here are answers to some of the most common questions about the recent and upcoming employment law reforms in the UK.

What's the new qualifying period for unfair dismissal claims?

From January 2027, the qualifying period drops from two years to six months. During that initial period, a lighter-touch dismissal process applies, but you'll still need a fair reason and a reasonable procedure.

How will zero-hours contracts change?

Employers will need to offer guaranteed hours to zero-hours and low-hours workers based on their regular working pattern over a reference period. The exact start date is expected in 2027, but hasn't been confirmed yet.

What are the new rules around fire and rehire?

From October 2026, dismissing an employee and rehiring them on worse terms will be automatically unfair dismissal. The only exception is where you can prove genuine financial distress that threatens the viability of the business.

How do the employer NICs changes affect small businesses?

Employer NICs increased from 13.8% to 15% in April 2025, and the threshold at which you start paying dropped to £5,000. This raises the cost of employing each member of staff, so you should factor this into your budgets and financial forecasts.

Are contractors and gig workers affected by these changes?

Most of the Employment Rights Act 2025 applies to employees and workers. However, reforms around umbrella company regulation and zero-hours contracts will improve protections for some gig economy workers. If you engage contractors, review how they're classified to make sure you're meeting your obligations.

What are the penalties for not complying with the new employment laws?

Penalties vary depending on the breach. Minimum wage underpayment can result in fines of up to 200% of the arrears, public naming, and potential criminal prosecution. The Fair Work Agency has the power to investigate and enforce a range of employment rights, and tribunal awards for unfair dismissal and other claims could increase as caps are reviewed.

Disclaimer

Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.