Autumn Budget 2026 – Employment, Pensions and Incentives

Yesterday, the Chancellor of the Exchequer, John Healey, unveiled his 2026 Budget against an economic backdrop that remains very challenging. The Chancellor characterised it as a ‘breathing space budget’ for ‘the working people of Britain’. The Budget has been described by commentators as ‘modest’, with ‘small-scale policies’. 

This blog post sets out a high-level summary of measures announced by the Chancellor that are relevant from an employment, pensions and incentives perspective.

Increases in National Minimum Wage/National Living Wage and Full State Pension but income tax and National Insurance thresholds remain frozen 

The National Living Wage for those aged 21 and over has been increased by nearly 4% to £13.20 per hour.  The National Minimum Wage, applicable to those between 18 and 21, has risen to £11.27.  The decision has been taken not to accelerate any convergence between youth and adult rates because of concerns that young people might as a result be priced out of the jobs market. 

As trailed in advance, the Chancellor also confirmed an increase in the full state pension by almost 4%, meaning that it will rise to £13,036 from April. However, because the effect of this increase would otherwise push a significant number of pensioners on low incomes above the £12,570 personal allowance threshold, requiring them to pay income tax, the Chancellor also announced a new Pension Tax Allowance (increased to £13,036), removing income tax liability for pensioners (i.e. people over state pension age) with total income up to the value of the new State Pension from 6 April 2027 until 5 April 2030. 

Income tax and National Insurance thresholds remain frozen, with the consequence that salary inflation will cause more people to fall within the tax net for the first time or to pay tax at a higher income tax band. 

Share Plans – CSOP rebranded as EMI2 along with other share plan changes

The Chancellor has announced a number of beneficial changes to Enterprise Management Incentive (EMI) options and Company Share Option Plans (CSOPs). EMI options are designed to help eligible small high-growth businesses recruit and retain employees, so include restrictions on the size and sectors of companies that can grant them.  CSOPs are available to companies of all sizes and in all sectors and so the Chancellor is positioning CSOPs as the natural successor to EMI options as a company grows and scales.  To support that approach, CSOPs are being rebranded as EMI2 plans. 

The limit on the value of options an individual can be granted under an EMI2 plan is currently set at £60,000.  That limit will be doubled to £120,000 with effect from 6 April 2027.   

The interaction between EMI and EMI2 individual option limits will also be removed.  This will have a beneficial effect, allowing individuals to fully utilise both the £250,000 limit available for EMI options (if EMI qualification requirements are met) and the £120,000 limit that will now be available for EMI2 options.

Various other changes are also being introduced to EMI and EMI2 option arrangements, including:

• increasing the maximum exercise period for EMI2 options from 10 to 15 years from the date of grant (with the potential to extend exercise periods for options that have already been granted without losing their tax favoured status);
• increasing the exercise window within which EMI options must be exercised following a disqualifying event from 90 to 180 days; and
• increasing the period during which certain shares and share options can be set aside for employees without triggering the disguised remuneration rules from 10 years to 15 years.

Introduction of new Founders’ Relief

From 6 April 2027, the Government is introducing a 10% capital gains tax rate for qualifying disposals by founders or early investors of high-growth, innovative companies, subject to a £10 million lifetime limit. The Chancellor described this as a measure to support ‘the founders of our most successful firms’ and it is clearly intended to incentivise entrepreneurs to grow and divest UK businesses.

To qualify, individuals must hold at least 25% of the company at the start of trading. The company must also meet minimum turnover and employment thresholds and satisfy two of three specified growth and innovation tests.  There will be a technical consultation on the detailed design before the arrangements come into force.  It appears that the relief will only be available to a narrower group of business owners and investors than those eligible to benefit from Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief). 

The Budget also signalled a reduction in the tax savings available under Business Asset Disposal Relief. From April 2027 the lifetime limit, under which qualifying disposals are eligible for a reduced 18% capital gains tax rate, will be halved from £1 million to £500,000. This change may affect individuals whose gains exceed the new lifetime limit, including employees disposing of EMI shares.      

Pension arrangements

The Government is proposing changes to enable the consolidation of defined contribution schemes and the introduction of the Guided Retirement framework and Retirement-only Collective Defined Contribution (RCDC) pension schemes. This will include expanding the circumstances when a scheme member may keep certain protections following a transfer and allowing members to transfer from an RCDC pension to a drawdown arrangement within a set timeframe. This will be introduced through Finance Bill 2027-28.

The Budget also reconfirmed previously announced measures to allow registered defined benefit occupational pension schemes to make discretionary payments of scheme surplus to members as an authorised member payment. These will be introduced through Finance Bill 2026-27. 

Additionally, the so-called two-year rule for pension and lump sum death benefits is being abolished. Beneficiaries will no longer face an income tax charge where a lump sum death benefit is paid more than two years after the pension scheme becomes aware of the member’s death, provided the member had enough available lump sum and death benefit allowance. The measure applies to any payments made after 28 October 2026 regardless of when the member died. The government will also make changes to the way tax is assessed and collected where a deceased member’s lump sum death benefit allowance has been exceeded to provide greater certainty to individual beneficiaries – details are expected in the Finance Bill 2026-27.

The Government is also making changes to the definition of terminal illness to make it easier for terminally ill individuals to access their pensions savings. Again, more detail is expected in the Finance Bill 2026-27. 

Statutory paternity pay

The Chancellor announced plans to extend statutory paternity pay rights, broadly modelled on maternity allowance, to eligible self-employed fathers, partners and adopters, with these arrangements to come into effect in April 2029.

Other non-tax measures

The Chancellor also announced significant measures on matters other than tax.

Following a speech given by the Prime Minister earlier in the month (see our blog post on this here), the Chancellor confirmed that the Government is considering a potentially radical overhaul of UK rules relating to non-compete clauses. 

The Budget materials confirm that legislation will be introduced ‘to make sure that non-compete clauses will no longer be a barrier to hiring for our most promising startups and scaling firms’ and ‘so that people who help to build successful companies can more easily move on to the next’. Notwithstanding the reference to startups and scaling firms, the Budget materials confirm that reforms will apply across the whole economy. A consultation paper will be published shortly to ‘understand the wider use of restrictive practices’, following which a detailed Government position is expected to be set out ‘on all of these issues in early 2027 in advance of legislating’.  The scale of what the Government has in mind, and its full implications for employers (and indeed employees) will remain unclear until the consultation paper is published. 

In his speech, the Chancellor also alluded to possible action on ‘pay transparency in job adverts’ as a further gender pay gap measure. 

He also confirmed reforms to the skilled worker visa system to deliver what he characterised as the most pro-business migration system in Europe for highly skilled workers.  Proposed changes include the expansion of the High Potential Individual visa to graduates from the world’s top 150 institutions, changing visa salary requirements to help employers across the UK hire the people they need and giving the highest-skilled workers longer (up to six months) to find a new job. 

All in all, the Budget measures relevant to employers and their workers are best described as something of a hotch-potch.  However, the EMI2 proposals, in particular, are likely to be welcomed as an opportunity to provide greater incentives for employees on a tax-favoured basis.  

For more information on these measures, do please speak to the authors of this blog post or your usual Freshfields contact.