On 16 January 2024, there was a HMRC ‘simplification update’ announcing the mandation of payrolling benefits-in-kind (BIKs) from tax year 2026/27.
Example: Payrolling of medical benefit
The payroll department is advised that Roger has a medical benefit of £3,000 per year. He is paid monthly, so to account for the income tax and Class 1A National Insurance contributions (NICs), £250 is processed as a notional payment each month. HMRC held meetings with representative bodies; silence and a general election followed and there was no confirmation this would be pursued, until…
The October 2024 Autumn Budget
This contained the following statement:
‘The government confirms that the use of payroll software to report and pay tax on benefits in kind will become mandatory, in phases, from April 2026. This will apply to income tax and Class 1A National Insurance contributions (NICs).’
Until this, the announcement in January 2024 issued by the previous government was meaningless. Most would have predicted that payrolling would be a disaster if pursued in a ‘big bang’ way, so I was encouraged to read that the move to mandation was to be done in a phased way. I imagined, perhaps, medical benefit being mandated in 2026, followed by cars and vans in 2027 or something similar to the way we became used to auto-enrolment with staging dates.
The Phasing Reality
Then I read HMRC’s accompanying policy paper, ‘Confirming plans to mandate the reporting of benefits in kind via payroll software from April 2026’ and November 2024’s Agent Update, which detailed phasing in a way I never imagined. From April 2026, taxable values of all BIKs must be processed via the payroll with the exception of employment-related loans and accommodation, to be mandated later. Although, these can be processed on a voluntary basis if the employer is comfortable, they can calculate and process the taxable value each time the payroll is run. This is not a phased mandation. This is a mandation of the current voluntary system.
HMRC Concessions
HMRC has introduced two concessions as a result of stakeholder engagement following the January 2024 announcement:
- In recognition that employers will need time to adjust in tax year 2026/27,
HMRC will ‘monitor the penalty position’ in the first year of mandatory payrolling.
- Although HMRC expects correct taxable values to be payrolled, an ‘end of year’ process will be introduced to amend any errors in the tax year – whilst details are unknown, given the P11D will be for loans and accommodation only, this sounds like a ‘P11D by payroll’ process to me.
The Reality in Practice
As a payrolling advocate, having implemented it and been on the receiving end as an employee, I do not want to be negative about a proposal I broadly support. However, from experience, it is time to be realistic about this, always considering full details are not known at the time of writing.
Things to be aware of include the following:
- It’s not only benefits (and taxable expenses) that will be processed in real-time, but also the calculation of Class 1A NICs, payable with the monthly PAYE remittance.
- Forms P11Ds and the P11D(b) may be consigned to HMRC’s legacy pile of forms; however, this does not change the requirement for taxable benefits knowledge.
- To enable HMRC to report benefits provided by employers UK-wide, they will expect a granular breakdown of benefit information per employee, per pay period; however, this only matches our desire to provide detailed payslips, all facilitated by payroll software.
- BIKs that are ‘made good’ by the employee and those that will send the employee over the 50% allowable tax deduction are issues to be overcome.
- Communication with employees about the issues involved.
Practical Tip
Vitally, aside from the above considerations, accurate payrolling in real time depends on the real-time provision of information. Gone are the days when providers could give taxable values after the end of the year. From April 2026, we need this information when the payroll is processed (and by the cut-off).