From April 2026, HMRC intends to make payrolling of benefits mandatory. While this timeline could be subject to change, businesses should start preparing now to ensure a smooth transition.
Many employers are choosing to start payrolling benefits in the 2025/26 tax year to get ahead of these changes. This allows both businesses and employees to adjust before the process becomes mandatory, reducing the risk of administrative issues and giving employees more time to understand the impact on their pay.
What’s Changing?
Currently, a lot of employers report taxable benefits through a P11D form at the end of the tax year. HMRC then adjusts employees’ tax codes in the following year to collect the tax owed.
With payrolled benefits, tax is collected in real time. The value of the benefit is added to an employee’s gross pay each month, and the tax due is deducted immediately. This means no unexpected tax bills later.
Example: How This Works
Let’s take an example of an employee receiving a taxable benefit in the 2025/26 tax year:
Under the current system, the employee receives a P11D in July 2026, and HMRC adjusts their tax code to collect the tax in 2026/27
From April 2026, under the payrolled benefits system, the employer deducts tax on the benefit each month in real time.
Impact in the first year (2026/27): The employee will see tax deductions for both the prior year’s benefit (through a tax code adjustment) and the current year’s payrolled benefit at the same time.
By the following tax year (2027/28), this issue resolves, and only real-time taxation applies.
What This Means for Employees
While this system prevents surprise tax bills, employees need to be aware of the initial financial impact during the transition year (2026/27). Employers should communicate these changes clearly and offer support where needed.
Key Considerations for Employers
Employers must ensure they:
Regularly review and update payrolled benefit values (e.g., private medical insurance changes at renewal).
Update payroll with any changes, including new joiners and dependents.
Reconcile payrolled amounts at year-end to ensure accuracy.
Ensure final payroll runs for leavers include correct benefit values.
Submit the P11D(b) form to account for Class 1A National Insurance on benefits at the end of the tax year. (Deadline for P11d/P11d(b) submission is 6th July).
What Should Employers Do Next?
Employees should be informed of these changes well in advance. To assist with communication, we have created a customisable template that you may wish to use to inform employees of the upcoming changes.
Employee Communication Template
Important Update: Changes to Benefits
We want to inform you about an upcoming change to how tax is collected on benefits such as private medical insurance and company cars. Currently, these benefits are reported after the tax year ends, and HMRC adjusts tax codes in the following year to collect the tax due.
From April 2026, HMRC plans to introduce payrolling of benefits, meaning tax will be deducted in real time through payroll. This removes the need for a P11D form and ensures tax is collected as you go.
However, in the first year of the change, some employees may see a temporary reduction in their take-home pay. This is because tax will be collected both for the previous year’s benefits (through an adjusted tax code) and for the current year’s benefits (through payroll).
To help manage this transition, some employers are choosing to start payrolling benefits earlier, in the 2025/26 tax year. This can provide a smoother adjustment period and help avoid any surprises when the new system becomes mandatory.
At [enter company name], we plan to payroll benefits from April [enter tax year], meaning you will experience the transition during [this/next] tax year.
By the second year, everything will balance out, but we want to ensure you are fully informed and supported through this change. If you have any questions, please reach out to [HR/Payroll Contact].
Visit the benefit section of the help centre for more articles on benefits.