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New Upcoming Rules for Payrolling Benefits in Kind

From April 2026, UK businesses will face a new requirement from HMRC regarding how they handle taxes on employee benefits, such as health insurance or company cars. Instead of the current method, which involves reporting these benefits at year-end, companies will need to incorporate them directly into their payroll systems.

An overview of the current system

Currently, UK businesses report any non-cash benefits provided to employees, such as company cars or health insurance, at the end of the tax year using Forms P11D and P11D(b). This system requires employers to calculate the value of these benefits and submit the information to HMRC, which then adjusts the employee’s tax code to account for the additional taxable income.

Employers also need to pay Class 1A National Insurance Contributions on these benefits by a specific deadline. While this method has been standard practice, it can be cumbersome and time-consuming, leading to the upcoming change to streamline and integrate the process into regular payroll activities.

The new rule

HMRC will require all UK employers to process taxes on benefits in kind—such as health insurance, company cars, and other non-cash perks—through their payroll systems. This move away from the annual reporting model means that the tax and National Insurance Contributions associated with these benefits will be handled alongside regular wages.

The goal is to streamline tax administration, making it more efficient for businesses and transparent for employees by integrating the tax obligations of these benefits into the payroll cycle, thereby reducing the need for end-of-year tax adjustments and simplifying the overall tax reporting process.

What are the implications for employers?

Payroll system adjustments

Your payroll systems may need updates or modifications to handle the new requirements. This includes being able to calculate the tax on benefits in kind in real-time and integrate these calculations into the regular payroll process.

Administrative overhaul

The need for separate end-of-year reporting for benefits in kind on Forms P11D and P11D(b) will be eliminated, potentially simplifying your administrative tasks. However, this also means adapting to a new way of reporting and possibly retraining staff.

Employee communication

It will be important to communicate these changes to your employees effectively. They will see changes in their payslips and may have questions about how their benefits are being taxed.

How to prepare for the transition

  1. Review and update your payroll systems: Engage with your payroll software provider to discuss the upcoming changes and understand what updates will be necessary. Planning for these updates well in advance will ensure you’re ready to comply with the new rules from day one.
  1. Educate your team: Ensure your payroll and HR teams are aware of the changes and understand the implications. Consider arranging training sessions or workshops to cover the new processes and compliance requirements.
  1. Develop a communication plan for employees: Start planning how you will inform your employees about these changes. Clear, straightforward communication will help manage expectations and address any concerns they might have.
  1. Run tests: If possible, conduct tests within your payroll system to see how these changes will work in practice. Testing can help identify any potential issues early on, giving you ample time to make necessary adjustments.

By focusing on these areas, employers can position themselves well to manage the transition to mandatory payrolling of benefits in kind smoothly and effectively. The key is to start preparing now to ensure a seamless adaptation to the new requirements.

Get prepared now

With the new rule two years away from implementation, there may be a temptation to view this deadline as distant; however, the complexity of payroll systems and the need for thorough employee communication mean that the time to start preparing should be sooner rather than later.

Our outsourced payroll services are designed to alleviate the pressure on employers, ensuring that your payroll system is not only compliant with the new regulations but also optimised for efficiency and accuracy.

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