A major change for employers was confirmed in the 2024 Budget. Coming into effect from 6 April 2026, all employers will stop reporting benefits in kind on form P11D and will be forced to tax benefits provided to employees in real time through the payroll.
Voluntary payrolling of benefits has been around for a while, but from the start of the 2026/27 tax year, it becomes mandatory for all employers—regardless of size.
WHAT’S IN IT FOR HMRC?
There are lots of benefits for HMRC in making this change:
- No more P11Ds. HMRC will no longer have to process the 4 million P11ds submitted annually by employers. This will be a huge saving in time and cost for HMRC as they will no longer have to issue assessments to collect unpaid tax where employees have underpaid and/or change employee tax codes to collect tax on benefits.
- Real-time tax collection. Adding benefits to employees’ gross taxable pay means taxes are paid throughout the year, boosting HMRC’s cash flow. Currently, employees who have underpaid tax have until the following 31 January to settle up. This will no longer be the case.
- NICs paid sooner. Employers currently pay Class 1A NICs in the July after the end of the tax year. With mandatory payrolling of benefits, Class 1ANIC will move to real-time payments during the tax year via payroll providing HMRC with cash flow to the disadvantage of employers.
WHAT IMPACT WILL THIS CHANGE HAVE FOR EMPLOYERS?
Whilst employers will save time not having to prepare P11Ds at year end, what is currently a once a year task will become a monthly or even weekly reporting obligation which will put additional pressures on employers. The impact on payroll alongside the major changes to systems and processes to ensure accurate benefit reporting during the year should not be underestimated.
The process changes to enable accurate real-time benefit reporting will require careful planning particularly where responsibility for administering benefits lies across multiple stakeholders in HR, finance and tax. Information, often provided by third party benefit providers will need to be brought together in Real-time rather than after the end of the tax year. Similarly decisions will need to be made during the year to determine whether expenses and benefits are exempt, taxable through payroll with Class 1 NIC payable or taxable with Class 1A NIC due or taxed through a PAYE Settlement Agreement.
For those employers who provide multiple high value benefits to employees, the cash flow implications of having to account for NIC during the tax year rather than in the July after the end of the tax year will also need to be considered.
WHAT SHOULD EMPLOYERS DO TO PREPARE?
There’s no getting away from the fact that this is a fundamental change to the way in which benefits are to be reported and taxed. You’ll need to have good systems and processes in place to ensure compliance. There are penalties for getting it wrong. As employers you will also need to communicate the changes to employees so that they are prepared.
As you start thinking about completing the 2024/25 P11Ds, now is a good time to consider what changes will be needed. Including:
- Where’s benefit information held? This is often in multiple systems with different people responsible for administering each separate benefit.
- Third party involvement. Do you rely on third parties to provide information to complete P11Ds? How accurate and timely is this information?
- Getting it right. How do you correctly identify which benefits are subject to Class 1 National Insurance Contributions rather than Class 1A NIC?
- Plan for complexities. How will you deal with leavers and joiners during the tax year and/or benefit values that change in year? Including company car changes and flexible benefit arrangements and/or salary sacrifice arrangements
- Over reporting? You might currently be reporting benefits on P11Ds that may be exempt or considered trivial by HMRC? If that’s the case there may be a repayment opportunity.
- Benefit Charges. Do you provide benefits where the employee can make good to avoid a benefit charge to ensure that the making good has occurred? Private Fuel benefit is a good example where you might not now if a benefit charge is applicable during the tax year.
- PAYE Settlement Agreement (PSA) Make sure you’ve got one in place. A PSA is an agreement with HMRC that the employer will meet the employee’s tax and NIC bill on taxable expenses or benefits directly with HMRC. Where benefits and expenses are not exempt you need to have a PSA agreed with HMRC to avoid having to declare benefits on P11Ds or going forward taxing benefits through payroll.
- Secondments from overseas. It gets complex if you have employees on secondment from overseas or where benefits are provided by other group companies. A situation where your company has the responsibility to prepare a P11D but is reliant on another company to provide information?
This isn’t an exhaustive list, but it’s a good starting point.
The goal? “Be prepared”. You need to fully understand your current processes and identify where changes are needed.
TIMING IS KEY
Assuming the 6 April 2026 go-live date sticks you’ll need to:
- Have all relevant ready for payroll ahead of the first pay date in the 2026/27 tax year.
- Test your systems and processes.
- Communicate changes to employees well in advance.
VOLUNTARY PAYROLLING BENEFITS
Many employers already payroll benefits on a voluntary basis. You can still consider doing this for the 2025/26 tax year, but you will need to register with HMRC before April 2025. The obvious advantage is that it gives you a head start to test systems, identify issues, and smooth the transition ahead of the mandatory deadline.
ANY EXCEPTIONS?
Most benefits can be payrolled, but there are a few exceptions — beneficial loans and living accommodation. These require end-of-year calculations, so they’re currently excluded until legislative changes are made.
WHAT’S NEXT
This is a major change and places a huge burden on employers. The HMRC “impact assessment” is likely to significantly underestimate the scale of change required for most employers and as you might expect largely ignores the likely true cost.
To ensure that you remain compliant, it’s never too early to start. As a minimum you’ll need to:
- Understand your current position and the changes needed.
- Communicate effectively with employees to explain how the changes impact them.
Our Employment Tax Team at Cooper Parry has the expertise to guide you through these changes. From process reviews to tax accounting solutions, we’ll help you transition to the new arrangements smoothly.
Want to chat? Contact Patrick Crookes or Brian Cooper.
