2026 UK legal outlook: essential changes for SMEs
As we enter 2026, small and medium-sized enterprises (SMEs) and sole traders across the UK face a year of significant legal and regulatory change. From tax reporting and late payment reforms to data protection and employment law shifts, there’s a lot for business owners to prepare for. Understanding these changes early can help you stay compliant, avoid penalties and seize new opportunities for growth. To help you navigate this shifting landscape, here is a breakdown of the essential changes and the immediate steps you should take to ensure your business remains compliant.
Overhaul in Employment Law
A wave of enhancements to employees' rights is set to redefine the relationship between employers and employees as a result of the Employment Rights Act 2025.
1. Enhanced employee rights and dismissal protections
Statutory Sick Pay (SSP) reform: From April 2026, the current lower earnings limit for SSP will be removed, making SSP more accessible to a wider range of low-paid employees. Additionally, SSP will become payable from the first day of absence, instead of the current three-day waiting period.
Action: Update your payroll and HR systems to reflect the new SSP payment rules.
Enhanced family leave rights: From April 2026, Paternity and Unpaid Parental Leave will become day-one rights, removing the current one-year qualifying period. The restriction on taking paternity leave after shared parental leave will also be removed.
Action: Update your employee handbook and leave policies to reflect these immediate entitlements for new joiners.
Unfair dismissal: The current two-year qualifying period to claim unfair dismissal is expected to be reduced to six months. While this is a rollback from the government’s original commitment to a “day-one” right, it still means new employees will have significantly increased protection earlier in their employment. The exact implementation date is currently unknown, but it is unlikely to be before late 2026 or early 2027.
Action: Review and solidify your onboarding, performance management and probationary processes. Ensure you have clear, documented procedures for managing performance and conduct from day one to mitigate the risk of tribunal claims.
Employment tribunal time limits: Time limits for making a claim to an employment tribunal will increase to 6 months for all claims. The current time limit for most claims is 3 months.
2. Harassment Prevention and 'Fire and Rehire'
Sexual Harassment Prevention: From October 2026, employers will be required to take "all reasonable steps" to prevent sexual harassment of their employees, including harassment by third parties (like customers or clients). New legal reforms will soon also restrict non-disclosure agreements (NDAs), voiding clauses that prevent staff from reporting workplace harassment or discrimination. While the start date is unconfirmed, these changes aim to increase transparency and whistleblower protection.
Action: Implement clear anti-harassment policies and provide regular, mandatory training for all staff and managers.
Ban on 'Fire and Rehire': From October 2026, dismissing employees and immediately rehiring them on worse terms and conditions will become an automatically unfair dismissal in most circumstances.
Action: Avoid using this tactic to vary contracts. Focus on genuine consultation and strong variation clauses in employment contracts.
Making Tax Digital for Income Tax
A legislative shift in finance is coming via the phased roll-out of MTD for Income Tax Self-Assessment, a new way for sole traders and landlords to record and report their income and expenses to HMRC.
Who is affected: From April 2026, sole traders and landlords must comply if their annual income from self-employment and property is over £50,000. This cohort is significant for many SMEs operating as sole traders or partnerships.
What is required: Businesses must keep digital records and submit a summary of business income and expenditure to HMRC quarterly using HMRC-approved software, replacing the single annual Self-Assessment return.
Action: If you fall into this category and aren't already using digital accounting software, you need to choose and implement MTD-compatible software now (or appoint an accountant/bookkeeper who does). Training for yourself or your accountant/bookkeeper is essential. Find out more about MTD here.
Corporate Transparency
Changes to Companies House aim to combat fraud and increase transparency about who is running a company.
What's changing: All company directors and Persons with Significant Control (PSCs) must have their identity verified with Companies House. Find out more here.
Action: If you have not yet completed this process, ensure all relevant individuals are verified as soon as possible to avoid delays with future company filings.
Crackdown on Late Payments
In 2026, reforms aimed at cracking down on late payments (in B2B contracts) are expected to take effect following a Government consultation in 2025.
Changes are likely to include:
Limiting long payment terms to a maximum of 60 days, with a possible further reduction to 45 days after 5 years;
Introducing a 30 day period during which invoices can be disputed; and
Giving the Small Business Commissioner stronger enforcement powers against repeat offenders.
Late payments can be a major strain on small businesses, so these changes could improve payment certainty and support healthier cash flow.
Action: While legislation is pending, be ready to adjust your payment terms and invoicing to align with any future mandatory requirements.
Other Key Changes to Watch
Data Protection Laws: With phased implementation throughout 2026, the Data (Use and Access) Act 2025 (DUAA) will update the UK GDPR, simplifying compliance for SMEs while raising penalties for breaches of electronic marketing rules.
Key points: Simplified legitimate interest framework, relaxed consent rules for low-risk cookies and reasonable scope for Data Subject Access Requests (DSARs).
Action: Review data practices, cookie consent mechanisms and marketing compliance. Keep a watch out for more news on these changes.
2. Renters' Rights Act: Upcoming changes affect businesses in the rental sector. Find out more here.
Looking Ahead: Practical Tips for 2026
Embrace digital tools for tax and compliance now - don’t wait until deadlines loom;
Audit your contracts for payment terms, supply chain risks and compliance language;
Prepare HR updates to keep pace with evolving employment rights; and
Keep up with guidance from regulators like the ICO, HMRC and the Small Business Commissioner.
Heather Stark