Changes to Payrolling Benefits in Kind

On 16 January 2024, HMRC announced significant changes to the handling of taxable benefits in kind and the payment of Class 1A National Insurance Contributions (NICs). These changes will have a direct impact on payroll processes and should be factored into forward-looking financial planning for directors.

From April 2026, all employers will be required to process taxable benefits in kind through payroll. HMRC also plans to introduce a new online platform to enable employees to claim tax relief on business expenses not reimbursed by their employer. The overall aim is to reduce administrative complexity and simplify the tax system for both employers and employees.

Current Reporting of Benefits in Kind

Currently, employers must report benefits in kind using form P11D, which must be submitted to HMRC and provided to employees by 6 July following the end of the tax year. Income tax on these benefits is then collected through adjustments to PAYE tax codes or via Self Assessment.

While employers may voluntarily payroll certain benefits in kind, post-year-end reporting is still required. This includes submitting form P11D(b) and paying Class 1A NICs. These requirements add complexity and ongoing administrative work, particularly where benefits change during the year, such as renewals of private medical insurance or employee leavers.

Calculating some benefits on a monthly basis can be challenging, especially where employee contributions continue up to the P11D deadline. In addition, certain benefits, including beneficial loans and employer-provided accommodation, cannot be payrolled voluntarily and must still be reported on P11Ds. These factors have contributed to low uptake of voluntary benefit payrolling to date.

The Proposed Changes

Mandatory payrolling of benefits in kind from April 2026 introduces several challenges for employers. These include the need for consultation, legislative updates, revised HMRC guidance, payroll software changes, and staff training. From a financial planning perspective for directors, these changes may affect cash flow timing, reporting accuracy, and internal payroll resources.

The proposals aim to simplify the reporting and collection of income tax and Class 1A NICs on benefits. However, employees will effectively pay tax on benefits sooner, and there is potential for the Class 1A NIC payment deadline to move from its current date of 22 July, following the end of the tax year (when paid electronically).

The proposed new system for claiming tax relief on employee-incurred business expenses is a positive development, enabling faster repayment of tax where claims are valid. That said, the underlying rules on allowable expenses remain complex, increasing the risk of incorrect claims.

Given the scale of these changes, many businesses may wish to review their payroll arrangements. Working with a payroll outsourcing company can help ensure compliance, reduce administrative burden, and support accurate implementation of payrolling benefits in kind.