What businesses need to know about FRS 102, NIC rises and employee tax changes

Accountants are facing a flurry of confusing changes. Here we explain what every finance team needs to know.

FRS 102

What is it?

FRS 102 is the main accounting standard used by mid-market businesses. The Financial Reporting Council (FRC) has recently remodelled FRS 102 to better conform with international standards. The changes come into force on 1 January 2026 and will impact businesses in two ways: a) Lease accounting and b) revenue recognition.

What do accountants and finance teams need to know?

The biggest shift is that leases – such as vehicles, equipment and machinery – will now appear on the balance sheet. Meanwhile, the old distinction between ‘finance lease’ and ‘operating lease’ will disappear.  All leases will now need to be accounted for, with two exemptions: short-term leases (12 months or less) and low-value assets (such as laptops or phones).

Each lease must now be recorded with both a lease liability and a right-of-use asset.

As for revenue recognition, rent will no longer appear as ‘rent’ on the balance sheet but reclassified as depreciation and interest. This also means it’ll no longer be included in EBITDA either.

The new FRS 102 has a five-step model for revenue recognition, where businesses will need to:

1. Identify the contract(s) with a customer.
2. Identify promises in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to promises in the contract.
5. Recognise revenue when (or as) the entity satisfies a promise.

The new changes mean contracts will need to be examined more closely. “Accountants will also need to exercise more judgement,” says Andrew Sanford, partner at accountancy firm Blick Rothenberg. “For example, with leases, you’ll need to identify the costs of the lease, whereas previously you’d have been expensing them.”

Calculating a discount rate for leases is another hurdle. “Small businesses might struggle to find and calculate a discount rate,” says Tom Utley, a manager at Blick Rothenberg. “Meanwhile, identifying performance and disowning transactions for revenue recognition will both be significant judgements [for accountants].”

How will it impact my business?

“The FRS 102 revisions are a fundamental change in accounting treatment; it’ll change things significantly,” says Sanford. “You’ll need to think about your loan covenants, server purchase agreements, plus commercial terms and earnouts.”

FRS 102’s lease changes will affect any business that leases items such as cars, vans, coaches, lorries, equipment such as cranes and forklifts, tractors, boats, and railway stocks.

The revenue recognition changes in EBITDA may mean businesses may need to alter valuations in purchase or sales transactions. Bank covenants linked to EBITDA may need to be reset, while any bonus schemes, pensions and company debt tied to EBITDA may also require a rethink.

What can I do to prepare?

Get ready to get stuck into the admin. January 2026 might seem many months away, but knuckling down on this now will avoid nail-biting, last-minute panic later.

Businesses can start by identifying and compiling a list of any operating leases, which will involve digging out documentation.

“Step number one for the leasing standard is get your leases in order,” says Sanford. “The bottom line is that anything – such as property, vehicle leases, even photocopiers – will need to be accounted for, with all the documentation in place.”

Finance software may need to be updated, while finance teams might also want to invest in staff training too.

Communicating with stakeholders is crucial. As Utley says, “Investors and landowners might be confused about this big change to the balance sheet… You should start looking at their contracts and talking with them now.”

A rise in NICs and a reduction in the secondary threshold

What is it?

From 6 April 2025, the rate of employer national insurance contributions (NIC) has risen from 13.8% to 15%, which is expected to raise an extra £25bn for the UK economy.

Meanwhile, the secondary threshold – the level at which employers start paying tax on each employee’s salary – will be reduced, from £9,100 a year to £5,000. To confuse matters even more, from 1 April 2025 the national living wage has increased from £11.44 per hour to £12.21 per hour for those aged 21-and-over.

These moves have sparked a backlash, with many businesses fearing they’ll be hit hard by the increased costs, giving them no other option than passing on these costs to employees (in the form of less generous salaries, or even job losses) and customers (through price increases).

What do accountants and finance teams need to know?

As well as updating payroll (see below), accountants will need to advise their businesses/clients, perhaps even suggesting areas where they can cut costs.

“Strategies could include passing the cost onto customers or looking at your labour to make it more cost-effective,” says Sanford. “If you’re a shop for example, you may look at closing the store for the last hour when you get fewer customers, saving on labour costs.”

How will it impact my business?

Businesses in sectors which employ temporary staff and low-paid employees will be most affected. That’s largely retailers, hospitality, small firms, care providers and charities. It’s led to predictions of a hiring freeze in these sectors. Indeed, the latest Labour Force Survey from the Office of National Statistics (ONS) reported job vacancies have dropped to the lowest level since the pandemic.

However, some small businesses may be better off. The Employment Allowance has doubled from £5,000 to £10,500, which may help them reduce their NIC liabilities. Some larger businesses see an upside too: Greggs has said the rising living wage will give more money to consumers to spend on its sausage rolls.

What can I do to prepare?

The new measures could have a huge impact on recruiting. To compensate for the increased costs, businesses might look at:

• Making redundancies or putting the brakes on staff bonuses and salary increases.
• Lowering their tax bills by introducing a salary sacrifice, which involves an employee agreeing to give up some of their (pre-tax) salary and move into a benefit, such as a pension pot.
• Cutting the hours of part-time workers.
• Using more freelance staff (who pay their own NICs and won’t need to be paid a full-time wage).
• Using AI or technology instead of employing staff. Fashion retailer Next has said it won’t cut jobs but will use more mechanisation in its warehouses; Currys also plans to bring in more automation.

Christian Koch is an award-winning journalist/editor who has written for the Evening Standard, Sunday Times, Guardian, Telegraph, The Independent, Q, The Face and Metro. He's also written about business for Accounting Technician, 20 and Director, where he is contributing editor.