People & Leadership

Payroll changes for Irish employers to know about in 2026

Another new year and you need to start preparing for payroll changes, as a lot of the measures in the October budget come into effect now.

30 January, 20266 min read Share

Many payroll changes detailed in Budget 2026 will take effect this month.

However, the 2026 budget is not as generous as other recent budgets, with no increases in tax bands or credits—the first time in five years that this has not happened.

As a result, according to the Economic and Social Research Institute, there is to be a 1.3% decline in disposable incomes for many households, particularly for middle and higher-income households.

On top of the freezing of income tax bands and credits, the ending of temporary cost-of-living supports also lowers disposable incomes.

On the positive side, lower-income workers are to benefit from an increase in the minimum wage.

In addition, a significant milestone in 2026 is the commencement of pension auto-enrolment.

However, both initiatives mean extra costs for many businesses.

Here’s what we’ll cover:

Increase in minimum wage

A 65-cent increase to the minimum wage comes into effect from January 1.

The increase brings the minimum wage payable for all workers over the age of 20 to €14.15 an hour, an increase of almost 5%.

There are also equivalent pro rata increases for other age-related rates.

Increase in USC and PRSI threshold

In line with the increase in the minimum wage, there is an increase in the ceiling of the 2% rate of Universal Social Charge (USC), which goes up by €1,318, to €28,700.

This increase ensures that full-time workers on the minimum wage remain outside the top rates of USC, while also giving a modest benefit to all workers whose income is above that amount.

Employer PRSI (Pay-Related Social Insurance) threshold also rises from €527 to €552 per week–also in line with the increase in the minimum wage.

In addition, there is an extension to the reduced rate of USC for those who have a medical card and income less than €60,000. This has been extended to the end of 2027.

First deductions of pension auto-enrolment

The long-awaited pension auto-enrolment scheme is finally here, with the first deductions being taken from January pay packets.

This impacts employees who aren’t already in a qualifying scheme, are aged 23 to 60, and earn over €20,000 per year in that employment.

They are automatically enrolled in My Future Fund, the State’s statutory auto‑enrolment retirement savings system, with first contributions deducted from January pay.

Employees will initially pay 1.5% of their gross salary, a figure that will be matched by their employers, with the Government adding 0.5%.

The contributions will gradually increase over the coming decade, until they reach 6% of salary from both the worker and employer by year ten, with 2% coming from Government.

Businesses have been able to register their employees’ details since December 1 2025 and it is estimated that about 750,000 to 800,000 workers fall into this bracket.

The My Future Fund participant portal is also now live and employees can use their MyGovID login to see their contributions, which are broken down between employer, employee and Government contribution.

However, there may be a time lag of up to ten days in contributions appearing, as the funds make their way through banks.

Ireland is the last country in the OECD to bring in pension-auto-enrolment and it is a significant undertaking.

Authorities have warned there could be some teething problems, so it will be important to keep up to date with any communications from NAERSA (National Automatic Enrolment Retirement Savings Authority) in the coming months.

Also, in line with pension auto-enrolment, the Government has introduced new standards for pension schemes outside of My Future Fund to ensure they are at least as favourable for the participating employees.

For defined contribution occupational pension schemes that qualify for exemption from auto‑enrolment, the standards require total contributions of at least 3.5% of the employee’s gross pay (up to €80,000), with the employer contributing at least 1.5%.

The ‘maximum of €1,200’ relates to the auto‑enrolment system’s employer contributions in the early years (1.5% of €80,000), and does not apply to the exemption standards for existing schemes.

Significant extra costs for certain businesses in 2026

Both the increase in the minimum wage and the introduction of pension auto-enrolment impacts employers in sectors such as hospitality and retail.

These businesses typically have a higher proportion of younger workers who earn the minimum wage and do not have an occupational pension.

For these businesses, the extra financial burden could be substantial, and they may need to take direct action to manage increasing costs.

Actions could include:

• Budget future pension costs in labour forecasting.
• Cutting down on staff levels during quiet periods.
• Introduce self-service technology to cut down on staffing costs.
• Focus on higher profit-margin offerings.

However, in a positive for some businesses, the VAT rate on food for hospitality, as well as for hairdressers, will fall to 9%, from 13.5%, from July 2026.

This should go a significant way in helping to control costs for these businesses.

Increase in PRSI rates

Later in the year, from October 1 2026, all PRSI contribution rates will increase by 0.15%.

This is part of a multi-year plan, with a further 0.15% increase in 2027, followed by a 0.2% increase in 2028.

This is to help fund the Social Insurance Fund, such as the State Pension, and new benefits like pay-related Jobseeker’s Benefit.

Other tax increases

From 1 May 2026, there will be an increase in the carbon tax for all fuels of €7.50 to €71 per tonne of CO2 emitted. It has already been in place for petrol since October 2025.

This will impact transport companies or companies that use heavy equipment.

Reducing fuel use is the best long-term solution, and businesses should consider initiatives such as retrofitting or upgrading to electrical vehicles.

There are government grants available through the Sustainable Energy Authority of Ireland.

No changes in Statutory Sick Pay

Statutory Sick Pay entitlement remains at five days per calendar year, despite original plans to increase it to seven in 2025, and then ten days in 2026.

Employers must pay Statutory Sick Pay at 70% of an employee’s normal earnings, capped at €110 per day.

They also must pay for up to five days per year for an employee that has worked 13 continuous weeks.

The planned increases have been deferred due to cost concerns for employers, given other costs such as the minimum wage and pension auto-enrolment.

How to prepare for the new payroll changes?

Your payroll software should automatically update in line with the latest payroll legislation, including changes to the minimum wage, as well as deductions for pension auto-enrolment.

However, you should check with your provider to confirm they have updated their software.

You should also ensure that you have downloaded the latest version.

In addition, with such a major change imminent for pension auto‑enrolment, it would be advisable to run a test payroll to make sure everything is set up correctly.

Also, ensure that employees are kept in the loop and are aware of the deductions coming in their first January payslip.

Decision-making for the year ahead

Considering the new payroll changes, businesses should update their payroll software and prepare budget forecasts to accommodate for the changes.

Although the new budget brings some higher costs, it also includes specific reliefs and support initiatives that will help certain employers.  

This includes enhanced R&D tax credits, which will support innovation and competitiveness, as well as the lowering of the VAT rate for hospitality and hairdressing later in the year.

In the future, companies must remain resilient, creative, and mindful of costs to secure continued growth.  

And one way of driving efficiencies is to get the most from your accounting software, as it is an effective tool for gaining real-time insights to help you run your business run more efficiently, stay compliant, and make smarter decisions.