Changes to Payrolling Benefits in Kind

On January 16 2024, HMRC announced a significant change regarding the handling of taxable benefits in kind and the payment of Class 1A National Insurance Contributions (NICs).

Starting in April 2026, all employers will be required to process these benefits through payroll. Additionally, HMRC plans to introduce a new online platform to facilitate employees' claims for tax relief on business expenses that are not covered by their employers. The objective of these changes is to streamline administrative processes and simplify the tax system for both employers and employees.

Current Reporting of Benefits in Kind

At present, employers must report benefits in kind using a form P11D, which needs to be submitted to HMRC and provided to employees by 6th July following the end of the tax year. The income tax associated with these benefits is then collected by adjusting the employee's PAYE Coding Notice or through the completion of a Self-Assessment tax return. While employers have the option to voluntarily payroll certain benefits in kind, they are still required to complete some post-year-end reporting, such as filing an employer return form P11D(b) and paying Class 1A NICs.

Employers face additional monthly administrative burdens when there are changes in benefits, such as the renewal of a private medical plan or when employees leave the organisation. Calculating some benefits on a monthly basis can be challenging, particularly when employees contribute to the costs up to the submission of P11Ds by 6th July.

Moreover, certain benefits, like beneficial loans and accommodations provided to employees, are excluded from voluntary payrolling, necessitating the submission of P11Ds. These complexities have resulted in low adoption rates for voluntary payrolling of benefits.

The Proposed Changes

The proposed mandatory payrolling, set to begin in April 2026, presents several challenges. These include the need for thorough consultation, updates to legislation, revised HMRC guidance, payroll software upgrades, and training for employers. The intended changes aim to simplify the reporting and collection of income tax and Class 1A NICs associated with benefits in kind.

However, they also mean that employees will have to pay the income tax on these benefits sooner, and it is possible that the deadline for employers to pay Class 1A NICs could be moved from its current due date of 22nd July after the end of the tax year if paid electronically.

The plan to simplify claims for business expenses incurred by employees is a welcome development, as it should enable employees to receive tax relief more quickly for expenses they cover themselves. Nevertheless, the rules governing what employees can claim tax relief on remain complex and restrictive, which could result in employees making incorrect claims or seeking tax relief for ineligible expenses.