Payrolling benefits update

Following the recent Autumn Budget announcements, the government confirmed that the use of payroll software to report and pay tax on benefits in kind (BIK) will become mandatory, in phases, from April 2026. The current regime has been voluntary since the tax year 2016/17.

The change will be implemented in two stages, starting from April 2026, with all benefits apart from employment-related loans and living accommodation. This means that employers will need to report and pay tax on BIKs through payroll software, which will apply to both income tax and Class 1A National Insurance contributions (NICs).

HMRC has issued a policy paper, confirming plans to mandate the reporting of benefits in kind via payroll software from April 2026.

In short, HMRC will remove all expenses and benefits that are included in the employee’s tax code from the first payday on or after 6 April 2026 (apart from loans and accommodation), thereby increasing their personal allowances (where they are entitled to a personal allowance). To recap, the key points to note are:

• Transition from P11D: the current system, which allows for annual reporting of BIKs via form P11D, will be replaced in April 2026 (other than the exceptions - see below). Employers will need to process BIKs through payroll each time an employee is paid – weekly, fortnightly or monthly.
• Real-time calculation: Class 1A NICs, which are currently calculated annually, will need to be calculated in real-time and paid with the monthly PAYE remittance, which will include the tax on BIKs too.
• Stakeholder engagement: HMRC has engaged with stakeholders and considered feedback, leading to the phased approach. Guidance is due to be published in mid-to-late 2025, to assist software developers with the technical specifications on additional data items to be added to Real-Time Information (RTI).
• Granular breakdown: employers will be required to provide a detailed breakdown of BIKs in the Full Payment Submission (FPS) to HMRC.
• Exceptions: employment-related loans and accommodation will continue to be reported annually unless employers choose to voluntarily payroll these BIKs.

Employers need to consider their ability to change long-established processes to accommodate real-time BIK reporting. The transition is expected to pose challenges for employers as they adapt to the new requirements. It is worth evaluating if a trial would be helpful, perhaps by payrolling all or some benefits ahead of April 2026.

In planning, employers need to consider the various providers of benefits and expenses information who must inform them (and any outsourced payroll provider used) by the payroll cut-off about any changes. It’s a complex process that requires timely and accurate communication to ensure payroll reflects the most current information, as the real-time calculation of income tax and Class 1A NICs depends on the real-time provision of the correct information. It may be wise to start talking to benefit providers now, making sure any contracts agreed for provision post-April 2026 include clear agreements on timely data flow, as well as checking if the payroll software used has the functionality or when it will be available.

There isn’t a universal solution that fits all scenarios. However, our discussions with clients and benefit providers have highlighted key considerations. Our experienced team can offer advice and support. Whether you are considering early adoption of the scheme or preparing for the 2026 implementation, we are here to provide guidance. 

If you have any questions or simply wish to discuss the changes, please contact Susan Ball and Lee Knight.