Payrolling of Benefits in Kind allows you to voluntarily payroll certain taxable benefits in kind for you and your employees. This is more straightforward than reporting them annually on form P11D. This is because tax is collected through the PAYE system in real-time rather than via end-of-year adjustments.
Overview
Payrolling of Benefits in Kind has proven helpful because it simplifies the taxing of benefits in kind. Plus it also avoids surprise tax bills for your employees.
However, you may still be unclear about how this works in practice, what your responsibilities are, and what’s changing from April 2026.
What Is Payrolling of Benefits in Kind?
Payrolling is the process of taxing benefits in kind by including them directly in your employee’s salary. Instead of submitting forms P11D after the end of the tax year, you add the value of each benefit to your employee’s pay throughout the year.
This spreads the tax liability across the year. Additionally, it provides your employees with greater visibility of the tax they’re paying on their benefits in kind.
If you want to use this system currently, you’ll need to register with HMRC before the start of the tax year. Registration needs to detail which employees receive which benefits. HMRC will only accept applications in an approved electronic format.
Once you’ve registered, you’ll need to inform your staff in writing that benefits will now be taxed through payroll. Any written correspondence should explain how payrolling works and its impact on their net pay. HMRC provides example templates to help with this communication.
Which Benefits Can Be Payrolled?
Most benefits in kind can be payrolled. Although, two types of benefit are excluded: living accommodation and beneficial loans (i.e., interest-free or low-interest loans to employees). Currently, these still require reporting on form P11D.
One important rule applies to ‘Section M’ benefits – these are miscellaneous items that fall under 'other' on the form P11D. You must choose to either payroll all such items or none. Unfortunately, you cannot pick and choose individual ‘Section M’ benefits. However, one exception exists: income tax paid by an employer on behalf of directors must be payrolled separately.
Calculating Payrolled Benefits
Calculating payrolled benefits involves a few key steps. Firstly, you must establish the cash equivalent of the benefit at the beginning of the tax year. For example, company cars are valued according to their list price when new. Once you've established the annual value, this is then divided equally across the number of payroll periods in the year. Typically this would be at monthly intervals.
An example
Fisbin Ltd provides James with a company van with a cash equivalent of £3,600 for the tax year. He is paid monthly. Therefore £300 is added to his taxable pay each month and PAYE is calculated appropriately.
If the value of a benefit changes during the tax year – for example, where your employee changes their company car – you must adjust the monthly amounts to reflect the new valuation. Similarly, if your employee leaves partway through the year but continues to receive a benefit, the remaining taxable amount must still be included in their final payment.
Reporting Obligations
Even when benefits are payrolled there are still fulfil reporting requirements. What's more, all your employees must receive a written statement by 1 June following the end of the tax year. This statement should list the benefits included in their pay and their total value.
Although you don’t need to file P11D forms for payrolled benefits, you must still submit form P11D(b). This is used to report and pay Class 1A National Insurance Contributions (NICs) on all benefits, regardless of whether payrolled or not.
Equally importantly, any benefit not included in payroll must still be reported on a P11D, even where you use payrolling for other types of benefits.
Opting In and Out
Currently you can choose whether or not to payroll benefits, although this is changing. However once to you've opted in you must continue for the whole tax year. Although you should opt out immediately where specific circumstances arise .For example, if your employee leaves or has insufficient income to deduct the necessary tax.
If it's necessary to opt out, notice must be given to HMRC in the same electronic format used to opt in. Although, the opt-out typically becomes effective at the end of the tax year.
Adjustments in specific scenarios
Complications can arise where your employee makes good on a benefit – meaning they reimburse you for its cost. Therefore, this amount can be excluded from their taxable pay. However, if they fail to reimburse you by the final payroll of the year, the full value must be taxed.
Additionally, where you discover a payroll error at the end of the tax year, you may carry the adjustment forward to the following tax year .Alternatively you can submit amended FPS reports. Where this isn’t possible, remaining tax must be reported on a P11D.
Payrolling of Benefits in Kind - New changes from April 2026
From this April 2026, payrolling of benefits in kind becomes mandatory for most benefits. This announcement was made in January 2024 as part of HMRC’s drive to simplify tax reporting for both employers and HMRC. We would suggest this also consistent with the government's intention to streamline the administration and collection of UK taxes.
Under the new rules, all benefits except for living accommodation and loans must be payrolled. These two excluded categories mentioned above will still be reportable via P11D. Although this will be in a modified format, unless you voluntarily choose to payroll them.
Furthermore HMRC will also remove the requirement to submit form P46(Car). This is because real-time data collection via payroll software will make this redundant. A year-end process will allow you to amend benefit values where relevant.
There are also plans for employers to report Class 1A NICs through payroll software. As a result, this will eliminate the requirement for P11D(b) in future. However, these changes will be implemented roll in stages, and you should prepare well in advance.
What You Should do Now
It's important to assess whether your payroll software can handle benefit calculations. What's more you need to determine whether your employees will be impacted by the shift in net pay.
Additionally, you should consider testing voluntary payrolling now to prepare. Furthermore, having systems and processes in place early will make the transition smoother and avoid non-compliance when the new rules take effect.
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