Payroll benefits are an essential component of an employer’s obligations, offering a streamlined approach to tax management by integrating benefits directly into an employee’s payroll. This system, set to become mandatory in the UK by April 2026, aims to simplify the tax process by replacing traditional P11D forms with real-time taxation through payroll.
All employers who provide any benefits for its staff will be affected. Employers are responsible for registering benefits with HMRC, ensuring accurate data flow, and maintaining records. This includes all benefits except beneficial loans and living accommodation, although HMRC may adjust the current rules to allow these in the future.
Employer responsibilities
To comply with the new regulations, employers must register their benefits with HMRC using the online service before the tax year begins. This early registration helps avoid discrepancies in employees’ tax codes. Once registered, employers must continue to payroll the selected benefits for the entire tax year or as long as the benefits are provided. Additionally, employers are responsible for calculating the cash equivalent of each benefit, which is then divided across pay periods and taxed accordingly. Only payrolled benefits should be reported on the Full Payment Submission (FPS) sent to HMRC.
Employers must also ensure that any adjustments for employees who “make good” on benefits, such as paying for private fuel in company cars, are correctly accounted for. Communication with employees is crucial, informing them of how payrolled benefits affect their tax and what changes they can expect in their tax codes. Special considerations are needed for globally mobile employees and those on assignments, ensuring that benefits provided outside the UK are reported accurately and in real time.
Pros of payroll benefits
Efficiency and accuracy – By incorporating benefits directly into payroll, employers can ensure that the correct amount of tax is deducted in real time, reducing the likelihood of errors and the need for year-end adjustments. This also means employees pay tax on benefits as they receive them, avoiding the delayed taxation that occurs with P11Ds.
Simplification – Moving away from the P11D system simplifies the tax reporting process for both employers and employees. The transition to a fully payrolled system means that employees’ taxable income includes their benefits, reflected directly in their payroll, thus streamlining the overall process.
Transparency and compliance – Payroll benefits enhance transparency, ensuring that all benefits are taxed uniformly and in compliance with HMRC regulations. Employers can avoid the complexities and potential penalties associated with underreporting benefits, as the system enforces a consistent approach to taxation.
Improved employee experience – Employees benefit from a clearer understanding of their taxable income, as everything is handled within their regular payroll. This reduces confusion around additional tax liabilities that might arise from P11Ds, providing a more predictable financial outlook.
Administrative benefits – For employers, the move to payroll benefits can reduce the administrative burden associated with managing separate benefit reports, especially with the elimination of the P11D forms. Over time, this could lead to cost savings as processes become more streamlined.
Challenges and considerations
While the benefits of transitioning to a payrolled system are clear, employers must prepare for potential challenges. Real-time reporting requires that all benefit data is accurate and updated, which can be complex for organizations with benefits data spread across multiple systems.
Employers must also navigate the 50% limit on tax deductions, which could impact employees with low pay in certain periods, and they must still work out the Class 1A National Insurance contributions on benefits and complete form P11D(b) as this has caused known issues where employers have received penalties for failing to do so. Additionally, the requirement to account for benefits in kind on a real-time basis may pose difficulties for globally mobile employees or those receiving benefits from overseas.
It is worth employers considering the possibility that payroll benefits could potentially increase the administrative burden. It may require additional attention when employees leave to ensure their payroll totals are accurate for the year. Regular reviews and additional reporting may be needed to confirm that benefits haven’t changed, which could complicate processes.
The impact on employees will vary depending on the value of the benefits, but for some, it may significantly affect their take-home pay, particularly in the first year of implementation (e.g., 2025/26). A tax code change—stemming from a shift between the previous year’s P11d and the current year’s payrolled benefits—could reduce their net pay, which is important for employers to consider as they inform and keep their employees updated on any changes.
In preparation for the upcoming changes, employers should start considering how they will manage benefit data flows, possibly investing in software to track and report benefits accurately. Staying updated on legislative developments and engaging with HMRC’s guidance will be crucial in ensuring a smooth transition to the mandatory payrolling of benefits, so seeking insights and advice from our experienced team will ensure you avoid the pitfalls and penalties of non-compliance.
To register your benefits with HMRC, click here.
