HMRC have recently announced that from April 2026, the way in which benefits in kind are to be reported and paid is to change. Rather than using form P11D to report benefits annually, income tax and Class 1A National Insurance Contributions (NIC) on benefits in kind through payroll will become mandatory.
In this article, we will break down what that means for you and your business.
The Current Rules for Reporting Benefits in Kind
At present, the fundamental requirement dictates that taxable benefits and expenses need to be reported to HMRC using Forms P11D and P11D(b) no later than 6th July after the conclusion of the tax year.
The current system allows employers to either submit a P11D form to report employee benefits for taxation purposes or register to payroll benefits, which allows them to be taxed in real-time through PAYE.
What’s Changing?
In an attempt to simplify our tax system, the Government has decided to make payrolling benefits in kind mandatory from April 2026. The move aims to simplify our current system and remove the need for annual P11D forms.
From April 2026, all benefits with the exception of employer-provided living accommodation and beneficial loans, will need to be reported and taxed via payroll systems. This will see quite a drastic change and payroll systems will need to be tested to ensure they can handle these changes.
There is more work to be done by HMRC ahead of the changes being rolled out. They have confirmed they will consult stakeholders to iron out the final details of mandatory payrolling. They will also draft legislation that will be published later this year for consultation as part of the tax legislation cycle.
We expect that there will be further information and guidance from HMRC ahead of the changes coming into effect in 2026.
Why the Change?
As mentioned above, for many years UK employers have been required to report the benefits provided to employees on an annual basis, using P11D forms. This process requires forms to be submitted to HMRC before July 6th and can be a long, time-consuming process that involves lots of paperwork for both employers and HMRC.
The change aims to modernise the process. In 2016 HMRC introduced voluntary payrolling of benefits-in-kind, which allowed employers to report employee benefits in real time through their payroll systems, eliminating the need for P11D forms. The success of this voluntary scheme seems to have paved the way for them to make the change mandatory, saving both employers and the HMRC a long, paper-intensive process.
Key Considerations for Employers
The changes will remove the need for employers to submit paperwork to HMRC and should save them time, however, it could create a lot of work for employers initially, as they may need to make changes to their current systems and processes to account for the change.
Some of the implications for employers from 2026 will be:
- Less flexibility:Employers are currently able to voluntarily put benefits through their PAYE system, allowing them to select certain benefits and employees. However, in the new system, all benefits for all employees will need to be reported.
- The managing of data:In order to remain compliant and make sure that all benefits are listed in payroll, those who currently use multiple systems will need to make sure they have all the data required and are able to submit it on time every month going forward.
- Increased PAYE risk:With more tax being paid through PAYE, there is a greater risk of employers failing to meet compliance requirements.
- Employee impact:Issues could arise for employees, especially in 2026/27 when mandatory payrolling and PAYE code adjustments for prior years overlap, or if their taxable benefits have uncertain values (e.g., internationally mobile employees).
- Employee communication:As an employer, you will be responsible for explaining the changes to your workforce. You will need to take the time to clearly explain the changes and how this will affect them.
- Updating Payroll Systems: Employers will need to consider if their payroll systems can deal with the changes and if not, will need to start thinking about the costs associated with upgrading their current software.
- Process impact: As of yet, there is no guidance on how loans and accommodation benefits will be processed via the payroll. Employers will also need to consider and plan for how last-minute benefit changes for leavers will be processed before payroll cut-off.
