Preparing for the mandatory payrolling of benefits in kind
Employers will be required to payroll benefits from April 2026. Here’s what they need to consider.
Benefits in kind – what’s the current position?
The basic position is that taxable benefits and expenses must be reported to HMRC on Forms P11D and P11D(b) by 6 July following the end of the tax year.
Using information reported on the P11D, the employee pays the associated income tax through self-assessment, or HMRC collect it through an adjustment to the employee’s PAYE code. The employer must pay the associated Class 1A NIC to HMRC by 19 July following the end of the tax year, or 22 July if payment is made electronically.
However, with HMRC’s agreement, employers can currently choose to operate income tax withholding on most benefits through payroll. Administering benefits in this way reduces the employer’s reporting burden, as P11Ds need be submitted only in respect of benefits that can’t be ‘payrolled’ (for example, accommodation and loans subject to interest at less than the official rate), though the employer is still required to submit a Form P11D(b).
What’s changing?
As a measure to simplify and modernise the tax system, the government has decided to mandate payrolling benefits in kind from April 2026. HMRC have confirmed they will consult stakeholders on the details of mandatory payrolling, and that draft legislation will be published later this year for consultation as part of the tax legislation cycle.
Further information is expected through Employer Bulletins and other HMRC publications as specific proposals for mandatory payrolling develop. Employer guidance is also expected prior to 2026.
What should employers consider now?
Measures to reduce employers’ compliance burdens are in principle welcome. However, employers should carefully review the detailed proposals for the new regime when available, and start considering now what mandatory payrolling might mean for their systems and processes, for example:
Less flexibility: As employers who currently payroll benefits on a voluntary basis can exclude certain benefits and/or employees, what impact could being required to payroll all benefits and employees have (for example, on sourcing the relevant benefits data and the cash flow impact on employees)?
Data management: Benefits and expenses reporting will be key. All employers will need to understand and own the data flow in real time and report to payroll within the standard monthly payroll cut off dates for processing. If data is held in multiple systems, this will require careful management and stakeholder ownership in order to ensure compliance.
Increased PAYE risk: As the income tax administered through PAYE increases, so does the potential quantum of tax driven penalties for compliance errors;
Employee impact: It will be necessary to review the detailed proposals when available to understand the employee impact, but some individuals might experience cash flow issues for 2026/27 when mandatory payrolling and PAYE code adjustments for prior years overlap, or if their taxable benefits have uncertain values (for example, internationally mobile employees);
Employee communication: Explanation of the upcoming changes to all employees will be important. Take the time to clearly explain the upcoming changes and how this will impact your employee population(s);
Payroll impact: Does your current payroll software support payrolling benefits? What costs might your provider seek to pass on for any required upgrades? What payroll testing will be required?; and
Process impact: It is yet to be determined how loans and accommodation benefits will be processed via the payroll. In addition, employers will also need to consider how last minute benefit changes for leavers will be processed before payroll cut off. This is particularly important for benefits which usually carry a relatively high BIK implication such as company cars.
Home >Articles > Preparing for the mandatory payrolling of benefits in kind
Preparing for the mandatory payrolling of benefits in kind
Employers will be required to payroll benefits from April 2026. Here’s what they need to consider.
Benefits in kind – what’s the current position?
The basic position is that taxable benefits and expenses must be reported to HMRC on Forms P11D and P11D(b) by 6 July following the end of the tax year.
Using information reported on the P11D, the employee pays the associated income tax through self-assessment, or HMRC collect it through an adjustment to the employee’s PAYE code. The employer must pay the associated Class 1A NIC to HMRC by 19 July following the end of the tax year, or 22 July if payment is made electronically.
However, with HMRC’s agreement, employers can currently choose to operate income tax withholding on most benefits through payroll. Administering benefits in this way reduces the employer’s reporting burden, as P11Ds need be submitted only in respect of benefits that can’t be ‘payrolled’ (for example, accommodation and loans subject to interest at less than the official rate), though the employer is still required to submit a Form P11D(b).
What’s changing?
As a measure to simplify and modernise the tax system, the government has decided to mandate payrolling benefits in kind from April 2026. HMRC have confirmed they will consult stakeholders on the details of mandatory payrolling, and that draft legislation will be published later this year for consultation as part of the tax legislation cycle.
Further information is expected through Employer Bulletins and other HMRC publications as specific proposals for mandatory payrolling develop. Employer guidance is also expected prior to 2026.
What should employers consider now?
Measures to reduce employers’ compliance burdens are in principle welcome. However, employers should carefully review the detailed proposals for the new regime when available, and start considering now what mandatory payrolling might mean for their systems and processes, for example:
Less flexibility: As employers who currently payroll benefits on a voluntary basis can exclude certain benefits and/or employees, what impact could being required to payroll all benefits and employees have (for example, on sourcing the relevant benefits data and the cash flow impact on employees)?
Data management: Benefits and expenses reporting will be key. All employers will need to understand and own the data flow in real time and report to payroll within the standard monthly payroll cut off dates for processing. If data is held in multiple systems, this will require careful management and stakeholder ownership in order to ensure compliance.
Increased PAYE risk: As the income tax administered through PAYE increases, so does the potential quantum of tax driven penalties for compliance errors;
Employee impact: It will be necessary to review the detailed proposals when available to understand the employee impact, but some individuals might experience cash flow issues for 2026/27 when mandatory payrolling and PAYE code adjustments for prior years overlap, or if their taxable benefits have uncertain values (for example, internationally mobile employees);
Employee communication: Explanation of the upcoming changes to all employees will be important. Take the time to clearly explain the upcoming changes and how this will impact your employee population(s);
Payroll impact: Does your current payroll software support payrolling benefits? What costs might your provider seek to pass on for any required upgrades? What payroll testing will be required?; and
Process impact: It is yet to be determined how loans and accommodation benefits will be processed via the payroll. In addition, employers will also need to consider how last minute benefit changes for leavers will be processed before payroll cut off. This is particularly important for benefits which usually carry a relatively high BIK implication such as company cars.
