We are sharing this update from ACCA, our professional body, for the interest of clients and contacts. The content is (c) ACCA
As employers look to do more and more to attract and retain workers in what remains a hot labour market, many of them turn to benefits.
From 6 April 2026, HMRC has mandated that all benefits will have to be payrolled. You will need to register online for this. Registration for the 2024/25 tax year is open now and will close on 5 April 2024.
Things to bear in mind
There are a few fishhooks to watch out for when payrolling benefits.
The first is that there are two benefits you can’t payroll yet: employer-provided accommodation, and low- or no-interest beneficial loans. HMRC will presumably need to work out some kind of solution for these benefits ahead of 2026. Another is class 1A national insurance charges on benefits, which still need to be paid via the old P11D form system.
So it’s not quite ‘set-and-forget’ for taxing benefits just yet; you or the client will still need to keep accurate records and do quite a bit of filing at tax time. Again, this will hopefully be ironed out by HMRC soon.
Another fishhook is rare but can occur when an employee is on lower-than-usual pay while collecting a high-value benefit – perhaps on statutory sick pay, for example. This is the 50% rule: basically, you can never tax an employee for more than 50% of their total pay. You can potentially address this by carrying forward the taxable amount of the benefit into the next year or taking the benefit off payroll entirely.
What does payrolling benefits mean?
Payrolling benefits involves incorporating the cash equivalent of employee benefits into the payroll process, thereby taxing them through the PAYE system. This means that rather than waiting until the end of the tax year to report and tax each benefit through P11D forms, the tax is collected in real time, alongside regular earnings.
It’s crucial that employees are told about these changes; HMRC requires it, and it could impact an employee’s tax code.
If you need help working out the cash equivalent of a benefit, HMRC has a handy tool for company cars and guidance for other types of benefit. Modern payroll software should also be able to do this for you.
Why you should get ahead
So, why should you consider embracing payrolling benefits ahead of the pack? Firstly, it’s a matter of preparation. With the mandatory implementation deadline set for 2026, staying ahead of the curve allows practitioners to familiarise themselves with the intricacies of payrolling benefits, iron out any potential issues and ensure a smooth transition.
Proactivity in this regard not only mitigates the risk of non-compliance but gets ahead of regulatory changes and proactive in implementing necessary measures.
Moreover, there are significant advantages of payrolling benefits over the traditional P11D method. For a start, it significantly reduces administrative burden and complexity. Rather than grappling with multiple P11D forms at the end of the tax year, accountants can streamline operations, minimise errors and improve efficiency by incorporating benefits seamlessly into regular payroll calculations. This not only saves time and resources but also reduces the likelihood of errors or oversights that could lead to non-compliance.
It also offers greater transparency and convenience for both employers and employees. By taxing benefits in real time, employees have a clearer understanding of their total compensation package and tax liabilities throughout the year. And employers benefit from simplified reporting processes and enhanced control over their payroll operations.