Mandatory Payrolling of Benefits from April 2026

Background

Much has changed since P11D forms were introduced in the early 1960s, and with voluntary payrolling of benefits being introduced in April 2016, it meant that adding the value of a benefit to an employee’s salary allowed payroll systems to charge the right amount of tax, hopefully improving the taxpayer experience.

Up until recently, employers have been allowed the flexibility to decide whether they want to payroll benefits, and which benefits to include, which obviated them from completing P11Ds for those employees. However, HMRC announced in January 2024 that it intends to make the payrolling of benefits mandatory from April 2026, which means doing away with P11Ds for everything other than loans and accommodation initially.

This would mean that all payrolled benefits will have to be included on the Full Payment Submission (FPS) which is sent to HMRC before each pay day. Interestingly, the FPS currently only has two fields to allow for payrolled data, although HMRC have indicated that additional, more granular, data items will be added to the RTI specification sometime in mid to late 2025.

Is this a done deal?

Given the confirmation of these plans since the budget in November 2024, and the inclusion of the mandating in the Finance Bill 2024-2025, then we believe that HMRC will push ahead with these measures even though technical specifications may not be available until later in 2025, which leaves little time for the development of the necessary software elements.

How do things work currently with voluntary payrolling?

You can currently payroll any benefit except for:

• Interest free and low interest loans (Section H)
• living accommodation provided by the employer (Section D)

HMRC has taken the unusual step if setting the official rate of interest at the start of the tax year (2.25% for 2024-2025), which may allow legislation to be changed to allow these benefits to be payrolled relatively straightforwardly – but again, there is no word yet from HMRC on any proposed changes.

Many of our customers already payroll benefits and have registered with HMRC using the online service. Employers generally have the freedom to choose which benefits to payroll, with most sticking to the ‘easy’ ones, such as medical (Section I). However, some that would be reported as ‘other items’ (Section M) are not so easy, and employers must either payroll all items reported within Section M, or none. This is clearly another area that needs to be addressed by HMRC.

Once an employer has told HMRC that they are embarking on payrolling, HMRC will automatically identify all employees with the selected benefits or expenses in their tax code and remove them, issuing an amended tax code in its place – this can often be the first point of confusion, as a change in an employee’s tax code usually raises questions for the payroll team.

How does Payrolling Benefits work?

The tax due on payrolled benefits is collected by adding a notional value to an employee’s taxable pay each pay period. The amount of the cash equivalent to be payrolled would be worked out in the same way as when preparing annual P11Ds, but then divided by the number of payments to be made to the employee in the tax year (the pay period).

The resulting amount is added to the employee’s pay in the payroll each pay period. The item will usually be taxable but not subject to National Insurance, as Class 1A NIC applies, but this can depend on the treatment of the individual benefit. HMRC have now indicated that they are intending to make the reporting of Class 1A NICs monthly as well, although again, there are precious few details available at the time of writing.

Currently, any non-cash benefits that have not been payrolled are reported under the existing P11D procedure – there is currently no clarification on how that would work after 2026.

If an employer decides to payroll car and car fuel benefits, the same information detailed on the P46(Car) must be reported on the Full Payment Submission. Again, there is not much clarity on where this information needs to be stored, as most payroll systems do not accommodate car management solutions that offer that level of granularity. That information is likely to be calculated in external benefits system.

What other complications need to be addressed?

There is an ‘overriding limit’ in legislation which stipulates that an employee cannot have a tax deduction greater than 50% of their taxable pay in any pay period. When voluntary payrolling was introduced, however payrolled benefits are excluded from the calculation, meaning the 50% limit applies to the total pay, less the value of payrolled benefits. This could mean a tax deduction greater than the taxable pay when an employee is on reduced or no pay while sick, on maternity or on parental leave.

On the assumption there is no longer an option for a P11D to correct this, payroll systems will have to apply the 50% rules as normal, and any underpayment of tax will be recovered in the subsequent pay period. If there are not enough pay periods to recover the uncollected tax, HMRC will have to calculate any underpaid tax following receipt of the final Full Payment Submission and will notify the employee accordingly.

Another interesting area is staff that have left employment, as if the entire taxable value of the benefit has not been accounted for before the last payroll run (or can’t be as part of it), the employer must add the balance of the cash equivalent to taxable pay to date as a taxable amount in the Full Payment Submission, informing HMRC that the employee has left.

What about employee communications?

Once employers have registered for payrolling benefits, they need to notify their employees that benefits will now be taxed through the payroll, and ideally, the communication needs to explain payrolling benefits and how it works. Equally, just like with a P11D, employees need to be told about the benefits that have been payrolled and receive confirmation that the correct amount has been taken by June 1^st following the end of the tax year. We also assume that if the amount being payrolled changed in-year, then the employee would again need to be notified of the change.

Will employees be taxed twice?

Employees should not be taxed twice – currently HMRC set a tax code based on the last year’s return by assuming benefit values are broadly similar. So once registered for payrolling, that ‘estimate’ will be removed, and the new payrolled value used. However, in some circumstances, where a new employee received a benefits for the first time in the previous tax year, and that was only reported on a P11D, then they will effectively be paying ‘back tax’ as well as current tax.

What about employers Class 1A NIC?

Payrolling benefits ensures that tax due on the benefits is being collected in ‘real time’, but there is currently no way for ‘in year’ collection of Class 1A – that is still P11D(b) based. As discussed, HMRC have indicated that this will change, and Class 1A NICs will be reportable in the FPS – we will wait to see how that will be implemented.

What will happen to the P11D Organiser?

The biggest change is the software will move from organising benefits and expenses (P11D information) after things have happened, to organising the benefits information before things have happened – in essence, it becomes a Benefit Organiser.

The system will be enhanced to enable it to communicate with employees more frequently and will have additional ‘payrolling statements’ made available to keep employees updated throughout the year. More importantly, the system will have added export routines that allow cash equivalents based on pay period exported to a file that can be consumed by a payroll system. Currently these would be aligned to the two fields available in RTI for payrolled benefits (one covering the pay period, one covering year-to-date), but when HMRC finalise how mandatory payrolling will work, and the finer granularity they require, the reports will be updated accordingly.

Summary

Sadly, HMRC have pressed ahead with mandating real time reporting of benefits and expenses before they have provided the necessary infrastructure and technical specification that the payroll industry require. This will inevitably lead to confusion and tight deadlines for us, the software developer, but more importantly, for our customers.

Here at Personal Audit Systems Ltd, we believe we are ideally based to take advantage of these changes as we have a product in place that can already handle payrolled benefits, and it will only need tweaking to turn the system from a ‘P11D Organiser’, to a ‘Benefit Organiser’.