What is payrolling benefits in kind?

HMRC is making major changes to the way that benefits in kind are reported and paid.

From April 2026, payrolling benefits in kind will become mandatory.

The change will require employers to report and pay income tax and Class 1A National Insurance Contributions (NIC) on benefits in kind through payroll.

Currently, employers are required to report taxable benefits on Forms P11D and P11D(b) by 6 July following the end of the tax year.

The employee’s income tax is then adjusted via PAYE or self-assessment, and the employer pays Class 1A NIC by 19 or 22 July.

However, the new payrolling benefits system will become compulsory in 2026 as part of HMRC’s efforts to modernise the tax system.

This guide covers the most common questions we are receiving from our payroll clients about the upcoming changes.

Why is HMRC introducing payrolling benefits?

The system is changing to simplify the tax process.

The new system will reduce administrative burdens for employers, enhance accuracy in tax deductions, and ensure that employees pay the correct amount of tax on their benefits in real-time.

This shift will also help HMRC improve compliance and streamline tax collection.

How does payrolling benefits work?

Payrolling benefits involves including the taxable value of employee benefits directly within the payroll system.

This means that the tax on these benefits will be deducted in real-time through PAYE, eliminating the need for separate reporting via a P11D form.

Any taxable benefit that an employer chooses to payroll must be included in the payroll system.

Examples of payrolling benefits:

• Company cars

• Private medical insurance

• Loans*

• Other taxable perks

*Except for interest free and low interest loans; and living accommodation provided by the employer.

Essentially, all benefits that would normally be reported on a P11D will be integrated into the payroll under the new system.

What is a P11D?

A P11D is a UK tax form that employers use to report benefits in kind (BIK) provided to employees.

These benefits include non-cash perks, including company cars, private healthcare and other taxable benefits that are not automatically taxed through the payroll system.

When does payrolling benefits become mandatory?

Payrolling benefits will become mandatory for most employers starting from the 2026 tax year – April 2026.

HMRC is implementing the change to streamline the taxation process and ensure that benefits are taxed accurately and efficiently.

Regular payroll deadlines will continue to apply for the ongoing reporting and tax deductions of payrolled benefits.

HMRC will provide further guidance on payrolling benefits in kind and consult stakeholders before the implementation, with draft legislation expected to be published later this year.

How to register for payrolling benefits

As an employer, you must register for payrolling benefits through HMRC’s online service.

This registration should be completed before the start of the tax year in which you wish to implement payrolling.

Once your business is registered, you can include benefits in the payroll and comply with the new reporting requirements.

How to prepare for payrolling benefits in kind

Ahead of changes to payrolling benefits, Prime Accountants recommends employers start assessing the potential impact of mandatory payrolling on their systems and processes.

These considerations will help employers prepare for the upcoming changes and ensure a smooth transition to the mandatory payrolling benefits system.

Key considerations include:

Flexibility

Employers currently opting for voluntary payrolling can exclude certain benefits or employees. Mandatory payrolling will require all benefits and employees to be included, which could affect data sourcing and employee cash flow.

Data management

Real-time reporting within payroll cut-off dates will be crucial. If your data is currently dispersed across multiple systems, effective management will be necessary to ensure compliance.

Increased PAYE risk

With more tax handled through PAYE, the risk of penalties for errors increases.

Employee impact

Potential cash flow issues may arise for employees in 2026/27, especially if taxable benefits have fluctuating values.

Employee communication

Clear explanations of the changes are essential to ensure employees understand how they will be affected.

Payroll impact

Evaluate whether your payroll software can handle the new requirements, including any associated upgrade costs.

Process impact

Consider how complex benefits like loans and accommodation will be managed, and how last-minute changes, particularly for departing employees with high-value benefits, will be processed before payroll cut-off.

Testing

Update and test payroll systems to ensure you can handle the integration of benefits smoothly.

Training

Be aware that payroll staff may require additional training to manage the new processes effectively.

Professional support

Seek advice or consult with tax experts to ensure full compliance with HMRC guidelines.

Keep up to date

Monitor updates from HMRC regarding the implementation process and any additional requirements leading up to the April 2026 mandate.

Be aware of all changes

Currently, all benefits except beneficial loans and living accommodation can be payrolled. Be aware that HMRC may adjust the current rules to allow these in the future

Understand your obligations

Failure to prepare your business for the mandatory payrolling benefits could result in incorrect tax reporting, leading to penalties and interest charges from HMRC.

Additionally, employers may face increased administrative burdens in trying to rectify errors retrospectively.

This may cause confusion or dissatisfaction among employees regarding their tax liabilities.

Don’t feel overwhelmed by the latest changes from HMRC, our team of payroll specialists are here to simply the complex and support your business through the changes.

Contact our team for help and advice.

How to payroll benefits in kind

Under the new system of payrolling benefits, employers will need to:

• Assess and determine the value of all taxable benefits provided to employees
• Integrate these values into their payroll calculations

• Ensure that the payroll system is set up to deduct the appropriate tax on these benefits in real-time

• Report the payrolled benefits to HMRC through regular payroll submissions. This ensures that taxes on benefits are accurately deducted and reported alongside regular payroll processing

Do payrolling benefits need to be included on a tax return?

No. If benefits are payrolled, they do not need to be included separately on an individual’s tax return.

The tax on these benefits is already deducted through the payroll system, ensuring that employees do not need to report them separately.

Are payrolling benefits included on a P60?

The total value of payrolled benefits are included in the P60 as one total with the individual’s employment income.

The P60 reflects the total taxable income that has been processed through PAYE.

Will payrolling benefits in kind be easier for employers?

HMRC suggests that the new process for benefits in kind will be much easier for employers.

The payrolling system simplifies the tax reporting process by integrating benefit taxation into the regular payroll.

This will reduce the need for separate P11D submissions, minimises administrative tasks and provides clearer and more immediate tax deductions for both employers and employees.

Payrolling benefits sooner than April 2026 will help you get ahead of the curve and ensure you are fully prepared. Talk to our team to get started today.