Providing benefits in kind is an integral part of most employers’ reward strategy, affecting many diverse stakeholders including human resources/reward, benefit providers, the tax and payroll functions, software providers and, of course, employees. Having to report benefits in kind on form P11D has been a staple of the employer’s compliance cycle for decades, but it may become a relic of the past under HMRC’s proposals to require employers to report benefits in kind in real time through the payroll. This change will require a major transformation project for many organisations, which will depend on buy-in and co-operation from all of the stakeholders involved.

This article addresses HMRC’s announcement to mandate the reporting and paying of income tax and class 1A national insurance contributions (NIC) on benefits in kind via payroll software, including why employers should start planning for the changes now.

Digitalisation of benefit reporting

On 16 January 2024, HMRC announced a package of measures as part of a Tax simplification update, including the mandatory payrolling of benefits in kind from April 2026. HMRC has released very little detail on how this change will work exactly, but to date, we know that:

• the intention is for payrolling of benefits to be mandatory for all employers and all benefits (including benefits such as loans and accommodation that are currently excluded under the voluntary regime);
• income tax and class 1A NIC will need to be reported and remitted by employers through real time information (RTI) reporting, removing the need to file forms P11D and P11D(b); and
• forms P11D/P11D(b) will still need to be produced for tax years up to and including 2025/26 (filing deadline: 6 July 2026).

Impact on employees

For employees, the transition to payrolling benefits will not change the total amount of income tax paid on benefits. However, the method and timing for collecting income tax due may change. Under the current form P11D and PAYE coding system, HMRC’s systems take the benefit in kind values from the previous year’s form P11D to adjust employees’ PAYE tax codes for the forthcoming tax year. Often, this means that employees already pay approximately the right amount of income tax through the PAYE system in-year, although there can be delays when employees change jobs, or when they receive new benefits. 

When an employer enters payrolling benefits, HMRC will remove the benefits in kind from the employees’ tax codes to avoid any double deduction in the first year of payrolling. Going forward, where benefits are successfully payrolled in-year, employees should be paying income tax on a more up-to-date benefits value, even where they change jobs or are provided with changing benefits.

Impact on employers

For employers, this will mean:

• benefits will have to be reported via payroll software rather than on form P11D;
• there will be no requirement to file forms P11D/P11D(b) for tax years 2026/27 onwards;
• class 1A NIC will still be payable, but in real time via the payroll (and not via the P11D(b) process); and
• an annual statement of benefits received must still be provided to each employee (eg, the year to date benefit value on a final payslip).

Navigating the unknown

There are significant areas of uncertainty while HMRC consults on the policy design. These include:

• How are employers to deal with benefit values which change during the tax year (eg, loans), and how should employers deal with adjustments needed after the tax year?
• What will the penalty regime look like where the income tax/class 1A NIC on benefits in kind is not calculated quite correctly pay-period by pay-period?
• How will employers make adjustments after the end of the tax year, and will there be any exceptional circumstances where P11Ds are still going to be accepted (eg, in assessing qualifying relocation costs)?
• Employers must not deduct more than 50% in tax from an employee’s pay. Where the 50% rule would be broken, employers who currently operate voluntary payrolling arrangements have the option of ceasing to payroll benefits and completing a form P11D. How will this situation be dealt with when P11Ds are no longer used? 
• Could there be a staged approach, with first employee groups/benefits/employers being mandated from April 2026 and other employee groups/benefits/employers mandated at a later stage?
• How detailed will the reporting via RTI have to be? For example, will the payment summary (FPS) return have extra fields that replicate the current form P11D to some extent?
• Will the role of the PAYE settlement agreement (PSA) change?

Challenges for employers

While HMRC has hailed the announcement of mandatory payrolling as a simplification that will remove the need to file forms P11D, processing benefits through the payroll brings many challenges and pitfalls. HMRC will need to have regard to these as it defines the policy which underpins the draft legislation and guidance. Examples include:

Data complexity and integration

• Getting accurate data to payroll in-year from benefit providers, whether other parts of the business or third parties, can be challenging, with many employers finding it hard enough to get accurate data together for the current 6 July form P11D reporting deadline. Getting accurate data within the same pay period will often be difficult and, when it is received, it will no doubt eventually transpire not to be wholly correct.
• Data flows from third-party benefit providers are usually not set up to automatically integrate with the employer’s systems, requiring manual processes. To ensure accurate reporting, data flows would ideally need to be integrated to remove any manual intervention. This would require a change to current IT systems.

Employee populations 

• Some employee populations, such as internationally mobile employees, have more complex benefit in kind arrangements. Benefits are often bespoke to individuals’ personal circumstances, for example accommodation, relocation, immigration and tax loans. Because of their non-standardised nature and the complexity of the individuals’ UK tax residency status, accurate reporting of taxable benefits in kind on a form P11D is already a challenge. Accelerating the reporting to be in real time will be problematic. 
• Internationally mobile employees also often receive benefits overseas and obtaining the necessary data from overseas benefit providers is an additional challenge, not to mention sourcing considerations.

Complex benefits 

• For some benefits in kind, such as beneficial loans, the final benefit value will not be known until after the end of the tax year. HMRC’s current payrolling of benefits in kind rules already acknowledge this, and it is not currently possible to payroll loans or accommodation. There are also challenges in payrolling benefits where employees pay a contribution. 
• There are many other benefits where ascertaining the final value cannot be determined until the end of the tax year.
• Some benefit providers may offer dynamic pricing structures (eg, based on how often the service is used by employees), resulting in the full costs not being known until after the end of the contracting/invoicing period. 
• Benefits may need to be reported on an estimated basis meaning there would be a need to make adjustments, both in-year and potentially after the end of the tax year.

Employment lifecycle

• Employers will need to review processes for different points in the employment lifecycle within the tax year. This will require additional resource and budget and will be time intensive for businesses. For example, rather than an assessment once per annum, starters and leavers, newly promoted employees and employees on longer term leave (sick leave, parental leave) will need to be reviewed for their benefit provision for each pay cycle.
• Organisations will need to think about drafting and issuing employee communications to explain how payrolling of benefits will affect net pay, and how the design and content of their payslip will change (eg, with each benefit listed separately).

Michael Nicolaides, Partner, Deloitte LLP and member of ICAEW Tax Faculty Employment Taxes and NIC Committee, and Kym Wise, Director, Deloitte LLP. 

ICAEW’s Tax Faculty Employment Taxes and NIC Committee is working closely with HMRC to try to ensure that burdens on employers are minimised. If you have any points that you feel we should make, please contact Peter Bickley.

Further information

ICAEW’s dedicated webpage Employment taxes includes links to recent news articles, webinars and TAXguides. 

Listen to Pros and cons of payrolling benefits, the latest episode of The Tax Track, the podcast series from ICAEW’s Tax Faculty.