Upcoming changes to the P11D Benefit-in-kind process

Many people will be familiar with the P11D process – when an employer provides a taxable benefit to an employee, such as a company car or private medical insurance. Form P11D is prepared at the end of the tax year to report those benefits to HMRC.  The employee then includes the value of those benefits on their personal tax return, if they complete one, or otherwise the tax due is collected through their tax code.

Since April 2016 employers can voluntarily elect to payroll benefits. The value of the benefit is added to the employee’s salary and the tax due on the benefit is deducted via the payroll each time they are paid.  From April 2026, payrolling of benefits will become mandatory for all employers, effectively replacing the P11D.  This will be a significant change to the current process.  Identifying and calculating the value of benefits will need to be assessed every single pay period, rather than retrospectively at the end of the tax year, so the timing of this will be crucial.

The benefits associated with living accommodation and low or interest free loans provided to employees are currently excluded from payrolling, however it is expected these will be included within payrolling by 2026.

Class 1A National Insurance contributions paid by the employer (including on payrolled benefits) are currently reported annually on a Form P11D(b). Again, it is expected (but not yet confirmed) that these amounts will be payable to HMRC in-year, along with the usual PAYE tax and National Insurance payroll deductions.

Employers will need to ensure their payroll software can deal with payrolled benefits and the reporting requirements to HMRC.  In addition, they will need to ensure any staff involved in processing payroll are trained on the new processes.

Employers will also need to communicate the changes to employees, to ensure they understand how their benefits are being reported to HMRC and the information shown on their payslip.

The new system aims to simplify tax reporting and ensure the correct ‘real time’ calculation of tax.  Often there can be a delay in tax codes being updated to reflect new benefits, or an employee is taxed on an estimated benefit value through the year until the employer reports the actual value at the end of the year.  The key to enabling this will be ensuring employers have a system of identifying and reporting benefits to payroll teams and this should be addressed sooner rather than later to ensure a smooth transition once the payrolling of benefits becomes mandatory.

For assistance in reviewing your payroll processes, or to explore the potential and benefits of outsourcing your payroll to a professional bureau, contact us for further information.

This information is given by way of general guidance only, and no action should be taken based solely on the information contained herein. No liability is accepted by the firm for any actions taken without seeking appropriate professional advice.