The Government has announced it will mandate the reporting and paying of Income Tax and Class 1A National Insurance Contributions (NICs) on benefits in kind (BiK) via payroll software from April 2026.
This change further supports the drive to digitise the reporting of BiK and simplify and modernise the tax system.
It is anticipated that the digitisation of the process for reporting and paying tax on employment benefits will remove the requirement for 4 million end of year returns.
Current rules for payrolling benefits
Payrolling benefits and expenses through the Government’s online service is currently optional, with employers registering before the start of the tax year they wish to payroll for. Employers can decide which benefits to payroll and for which employee.
When employers use the payrolling benefits and expenses online service they are no longer required to submit a form P11D. They must still work out the Class 1A National Insurance contributions on benefits and complete form P11D(b).
Employers are required to add the cash equivalent of the BiK to the employee’s pay and then tax them though their payroll. The calculation of the cash equivalent is the same as for a benefit that is reported on a P11D.
HMRC ensure the value of the benefit is not included in the employees’ tax codes.
The majority of benefits can currently be payrolled, excluding employer provided living accommodation and interest free and low interest (beneficial) loans, which must still be reported on a P11D. If company car benefits are payrolled, there is no requirement to submit a P46 (car) form.
Employees must be given written notification that their benefits are being payrolled and what it means for them – this includes details of the benefits and the amount that has been payrolled for optional remuneration.
Proposed reforms to payrolling benefits
Mandating the use of payrolling benefits is being introduced to streamline the process for employers and create less confusion for employees.
Payrolling benefits allows BiK and expenses to be taxed in real time through pay as you earn (PAYE), without the need to submit a P11D form. Employees’ tax codes should often be simpler by payrolling benefits and PAYE deductions more accurate.
Class 1A National Insurance contributions on the cash equivalent will be payable via payroll software, rather than being reported and paid separately to HMRC using form P11D(b). It is currently unknown whether the due date for paying Class 1A National Insurance will change.
It is also still uncertain how the two benefits currently excluded from payrolling (accommodation and loans) will be dealt with and if employers will be able to process these through their payroll software.
The proposal to mandate the payrolling of all BiK is significant and one that will require employers to spend time familiarising themselves with the new legislation to consider what the change will mean for their processes and systems.
HMRC have confirmed that they will consult with relevant stakeholders on the details of mandatory payrolling ahead of its implementation in April 2026.
It is anticipated that draft legislation will be published later this year, with further employer guidance expected prior to 2026.
In the meantime, employers could consider
- The impact of being required to payroll all benefits and the potential effect on cash flow;
- The capabilities of accounting software, how it supports the payrolling of benefits and if any testing is required;
- Their payroll systems – any changes required and how long these changes could take;
- The impact on employees; and
- How the changes are communicated to employees, ensuring they understand how this legislation will impact their pay.
How M+A Partners can help
We are experienced in the process of taxing employees’ benefits and expenses through payroll. For any queries on registering for payrolling benefits and expenses with HMRC or the impact that the mandating of payrolling might have on your organisation, please get in touch with your usual M+A Partners contact.