by Kathy Lloyd
Employment Tax Director
19 February 2025
Articleby Kathy Lloyd
Employment Tax Director
The Government has mandated the payrolling of benefits in kind from April 2026 as a measure towards:
If your business provides taxable benefits in kind to employees, you will be affected by these changes.
What are benefits in kind?
A benefit in kind refers to goods, services or any non-cash benefit provided to an employee, for free or at reduced cost by an employer. The most common benefits are private medical insurance, company cars or vans, taxable travel, no/low interest loans and living accommodation.
What are the current rules?
Currently, benefits in kind must be reported on Forms P11D and P11D(b) to HMRC by the 6th July following the close of the relevant tax year. Employees pay the income tax on the benefit value declared, through self-assessment or HMRC collects it through an adjustment to the employees tax code. The employer must pay Class 1A National Insurance (NIC) by 19th or 22nd July, the rate of which is 13.8% for the 2024/25 tax year, rising to 15% from 6th April 2025.
However, most benefits in kind can also be payrolled on a voluntary basis, where employers have formally registered with HMRC to do so, and employees agree. Registration must take place before the start of the tax year, so the 5th April 2025 will be the final date for employers to opt for voluntary payrolling. Although the earlier an employer registers, the more time HMRC has to make adjustments to employees' tax codes, mitigating the risk of over/underpayments of income tax and/or several tax codes changes which employees query.
Whereas informal/unregistered payrolling of benefits is no longer accepted by HMRC.
Payrolling benefits requires the employer to still work out the taxable value outside of payroll and arrive at the notional amount to add to employee taxable income each pay period – without delivering the cash. This information is then reported to HMRC in “real-time” by the employer as part of the standard payroll process. Following the end of the tax year, the employer must still submit Forms P11D for any non-payrolled benefits and Form P11D(b) by 6 July, paying any Class 1A NIC by 19th or 22nd July.
Currently no/low interest loans and living accommodation cannot be payrolled. However, HMRC has set the official rate of interest at the start of the 2024/2025 tax year, if we see the same approach for 2025/2026, this will demonstrate a step towards beneficial loans being payrolled in the future.
What are the new rules?
Payrolling will become mandatory from April 2026 for reporting taxable benefits to HMRC in real-time, except for no/low interest loans and living accommodation. Employers will have the opportunity to voluntary payroll these two excepted benefits from April 2026.
Fully payrolled taxable benefits will remove the requirement to file Forms P11D and it is also proposed that payrolling will include Class 1A NIC, removing the need for a P11D(b) to be submitted.
HMRC has committed to publishing detailed technical guidance in 2025, which we believe may not be released until Autumn 2025 – including tax year end processes and adjustments that may be required. Despite this delay, there is still opportunity for employers to plan and act now, drawing on:
What does this mean?
In our view, this is the biggest change to payroll processing, since the introduction of “real-time information” over 10 years ago.
Whilst we expect HMRC to apply a “soft landing” around compliance, penalties and interest for the mandatory regime, employers will still want to pay employees right, first time, and on time.
Employers will need to assess current state of governance, processes and controls across:
to inform the roadmap of change and identify stakeholders up front.
How can we help?
At James Cowper Kreston, our employment tax specialists can guide clients (and their employees) through the detail of the new legislation, using their deep technical and practical experience across payroll, global mobility and the Form P11D reporting regime.
Contact our Employment Tax team, or your usual contact at James Cowper Kreston today to discuss these changes or your P11D obligations so we can help you maximise your business potential.