Payrolling benefits in kind

First announced by the previous Government in January 2024, the move to mandatory payrolling of benefits from April 2026 has been confirmed. However, in a departure from previous guidance, employment related loans and living accommodation have been carved out of mandatory payrolling due to their complexities.

This will mean that from the 2026/27 tax year, income tax and Class 1A NIC due on the majority of BIKs must be reported to HMRC in real time through payroll and no longer reported annually via P11D and P11D(b) forms. It will still be possible for employers to prepare a Form P11D and P11D(b) to report employment related loans and living accommodation BIKs if they do not wish to voluntarily payroll these benefits.

For most, the move to mandatory payrolling won't come as a surprise given voluntary payrolling of benefits has been in place since 2016 and many UK employers are already payrolling common types of benefits, such as private medical insurance and company cars.

On the face of it there are positives to simplifying and modernising the reporting process, including:

• Significant reduction in the need to issue coding notices to employers when an employee’s tax code changes, alleviating the need to adjust an employee's tax code the year after the benefit was received
• Increased transparency to employees of their income and taxes shown directly on their payslip, resulting in fewer queries to HMRC and employers
• Administrative efficiencies for employers and HMRC - over 300,000 P11D(b) forms were submitted to HMRC for the 2022/23 tax year. By payrolling the majority of benefits the annual exercise of P11D completion is largely removed
• Removing the risk of employers who currently payroll their benefits forgetting to submit their P11D(b) to report Class 1A NIC liability, or employers who aren't currently payrolling their benefits missing the filing deadline

However, as with any fundamental change to reporting requirements, the impact on time and resources for employers needs to be assessed. For smaller employers (1-50 employees) in particular, it may prove an onerous task to ensure they are capturing reportable expenses and benefits in real time. They will also need to consider available internal expertise to ensure the correct tax calculations are completed and reported.

HMRC  has been consulting with stakeholders, including Evelyn Partners, to develop its approach, however there is a lot to consider and a relatively short time frame to prepare. We are waiting for draft legislation that is expected to be published in 2025 and further information is expected to be released via employer bulletins.

While the consultation process  has allowed stakeholders to raise concerns and feedback to HMRC on how the calculation and reporting requirements will be changed, there are some obvious practicalities to consider:

• Some individuals might experience cash flow issues during the 2026/27 tax year if there is an overlap between PAYE code adjustments for prior years taking effect and mandatory payrolling commencing
• Additional real time information (RTI) reporting fields will be required for the new mandated payrolling of benefits, so there will be a need to engage with software providers early to minimise the potential for reporting errors although HMRC have announced that technical specifications for software providers will not be published until mid to late 2025
• It can be difficult to accurately determine some BIKs before the end of the year, notably employment related loans and living accommodation therefore employers wishing to payroll these benefits will need to consider the mechanics of doing so. This may be made more challenging by more frequent updates to HMRC’s official rate of interest, used to calculate the tax liability on these benefits, which will be reviewed on a quarterly basis from 6 April 2025

This is a complex area and represents a fundamental change to payroll reporting for employers. We can keep you updated ahead of the changes and support with implementation requirements, including:

• Drafting clear and concise employee communications. Employers will need to explain clearly the upcoming changes and how this will impact their employee population
• Process mapping of your benefit data collection and reporting sources, assessing your payroll cut off dates and planning for any changes to timelines
• Support with benefit calculations in line with your pay periods and in-year changes to benefits provided to your employees
• Hosting a pre-implementation workshop for key stakeholders involved in the payrolling of BIKs process to educate the team around the requirements, agree a process to manage compliance and identify and assign actions needed to achieve this
• Working with you to register to use HMRC payrolling of benefits and expenses online services if choosing to voluntarily payroll ahead of April 2026 
• Payslip testing once mandatory payrolling has been introduced to ensure that BIKs have been calculated correctly and the correct tax treatment has been actioned within the payroll
• Preparing in advance of the changes will be key to minimise disruption to your business and employees. If not already in place, you may wish to consider voluntarily payrolling some of the more common types of benefits from April 2025 to test your systems and processes and allow time for employees to adjust

If you would like to discuss this further, please reach out to Robert Day, your usual Evelyn Partners contact, or call 020 7189 2400.

Approval code: NTEH7042485