From 6 April 2026, the current voluntary reporting and payment of income tax (through the payroll) on employee benefits in kind will no longer be voluntary. Firms will have to report benefits through payroll software from this date.
As reported in a previous article, HMRC has advocated the payrolling of benefits (that would otherwise appear on Form P11D) for some time. HMRC from 5 April 2023:
- ceased to allow the informal (i.e., without seeking HMRC’s formal agreement, in advance of a UK tax year) payrolling of benefits
- stopped accepting paper Forms P11D
HMRC’s hope is that mandating payrolling will reduce the number of individuals having to submit personal tax returns. This hope may fade fast, as an individual receiving benefits (declared on Form P11D) is not something that in and of itself triggers a Self-Assessment tax return filing. The UK income tax on such benefits is typically collected through the payroll in the months after the P11D is filed. Nevertheless, HMRC’s view is that mandating will “simplify the tax affairs of three million people and reduce the need for them to contact HMRC.”
What about the nation’s unpaid tax collectors though i.e., the businesses required to operate Pay As You Earn (“PAYE”) income tax and National Insurance contributions (“NICs”)? In light of mandatory payrolling, we revisit this issue below.
While the new rules will mandate payrolling of benefits, questions of timing arise. For example:
- Although UK income tax and Class 1A NICs will be collected through payroll, it is not yet clear by when the latter must be so paid. For benefits (either formally payrolled or instead declared on Forms P11D and P11D(b)), Class 1A NICs must currently be paid in the July following the end of the UK tax year. It is not yet confirmed, but might make sense if Employer’s Class 1 and Class 1A NICs are combined and all NICs are payable with the PAYE income tax each pay period. This will have a cashflow impact for employers.
- The ‘made good’ rule could also be impacted. Employees do, on occasions, contribute to the cost of an expense or benefit with which they are provided. As the rules stand, in order to reduce the taxable (non-payrolled) benefit, the contribution must be ‘made good’ on or before 6 July following the end of the relevant UK tax year. When benefits are instead put through the payroll, e.g., monthly, then amounts may need to be made good sooner (and at least before the end of the tax year).
- Leavers: While some employers do formally payroll a number of benefits, they don’t always do this for all. This can be because, for example, not all benefits are (currently) practical to calculate accurately each pay period.
Dealing specifically with leavers, practical issues can arise even where a cost is thought to be known. If we use private medical insurance as our example, a policy cost may be agreed well in advance. If there is a delay in removing this benefit from a leaver, there could be a financial cost for both the employer and employee that would need to be clawed back.
Employers are reminded that, if they see mandatory payrolling for benefits as the direction of travel and wish to volunteer to do so sooner:
- The deadline has passed to do so for the current tax year (ending 5 April 2024),
- Approval for the next tax year (ending 5 April 2025) is before 6 April this year.
What happens next?
HMRC has said that it will:
- engage with stakeholders, to “inform design and delivery decisions”,
- draft legislation, which will be published later in the year (most likely for consultation and subject to any general election of course),
- work with industry experts to produce accompanying guidance,
- publish further information via the usual channels, such as Employer Bulletins.
Our teams of both Payroll and UK Taxation professionals will continue to monitor developments in this area, making representations to HMRC where we feel necessary. We will also continue to use market leading software products, to ensure our clients’ UK payroll affairs are in safe hands.
Please contact the Centralis team for further guidance.