On 16 January 2024, as part of their tax simplification update, the government announced that the payrolling of benefits in kind will become mandatory from 6 April 2026.

Those responsible for payroll and employee benefits within their organisation should start to prepare now to ensure both employers and employees are ready for this change.

The current treatment of benefits in kind 

The current stance is that payrolling of benefits in kind (non-cash benefits, such as health insurance, company car, etc.) is available to employers on a voluntary basis, providing that they have registered with HMRC in advance of the tax year. At present, employers that do opt for payrolling their benefits are still required to complete a P11D(b) form at the end of the tax year to enable the collection of Class 1A National Insurance Contributions (NIC), which is due on 19 July (or 22 July if paid electronically). For those not currently payrolling benefits, employers are still required to file both P11D’s and a P11D(b) form by the 6 July.

What will the changes mean, and why are they coming about? 

From April 2026, under the new rule, employers will be required to payroll non-cash benefits for Class 1A NIC and Income Tax, which will be calculated in real-time via payroll software and included on employees’ payslips, thus eliminating the need for P11Ds and forms P11D(b).  

The change aims to reduce the administrative burden of P11Ds by digitalising the PAYE Tax system and reduce delays between the provision of the benefit and the collection of the related tax. Currently, this is collected via tax code adjustments, which can often overlap into subsequent tax years, resulting in unexpected tax bills for employees and a rise in the number of related queries.

How can employers prepare for payrolling changes? 

We recommend that employers start considering payrolling their benefits in advance of the mandated change in 2026. This will allow them to become familiar with the process and allow adequate time to communicate with employees on how this will impact them. 

Other areas of consideration should be: 

• Data Management – employers will have to begin collating benefit data monthly and in a timely manner for it to be processed in real-time. Any inaccuracies in data reporting could have a direct impact on employees’ tax codes and net pay.  

• Monthly Administration – while the administrative burden of P11D’s is reduced at year-end, the payrolling of benefits in real-time increases the monthly administration for employers as the calculations for BIKs in each pay period will fall on the employer.  

• Double Taxation – employees that receive a P11D for 2025/26 may be impacted by a double tax hit, with tax code adjustments from the prior year overlapping with the payrolled benefits from 2026/27. This could lead to financial hardship for some employees, and it is uncertain if and how HMRC will find ways to mitigate this issue.   

• Overriding Limit – employers will have to consider how many BIKs that can be processed at one time as the amount of tax deducted cannot exceed 50% (known as the overriding limit). While this is something to consider, it will only be applicable for higher earners that are in receipt of numerous taxable benefits.    

• Class 1A NIC Payments - to date it remains unclear if the Class 1A NIC payment due date will change and raises the question that if it does change, how will that be managed and what cash-flow impact will that have on employers?

Ongoing updates and communication from HMRC 

The guidance published in this article is based on the January 2024 tax simplification update. We will keep you advised if any further changes are announced; HMRC will be publishing draft legislation later in the year as part of the process.  

While we await further guidance, employers’ attention should be drawn to the following nuances: 

The HMRC update advises that the 2025 to 2026 tax year will be the last year that they will accept P11Ds and P11D(b)s for annual reporting in most cases. However, it is noted that certain employee benefits will still need to be processed on a P11D due to the level of administration and complexities involved, such as employer provided living accommodation and beneficial loans. This is based on current guidance and could be subject to change in the future.    

Agents will also be able to register for payrolling benefits-in-kind on behalf of employers from the start of the 2025 to 2026 tax year, providing the agent has the relevant authority in place.   

Please note, HMRC reserve the right to change or delay the 6 April 2026 implementation of payrolling benefits. 

How our expert outsourced payroll team can help you 

If you have any questions or need further assistance, our dedicated payroll team at Buzzacott is here to help. Please don't hesitate to reach out for expert advice or support with any payroll-related matters. We’re committed to ensuring your payroll processes run smoothly and efficiently.