Farewell P11D: How to prepare for compulsory payrolling of benefits in kind

From the start of the new tax year in April 2026, payrolling of benefits in kind will become compulsory for many perks provided to employees. Cybill Watkins, Product Legislation Manager, explains what the change means and how to prepare.

HMRC is introducing the policy shift as part of wider plans to digitalise the tax system. It also aims to simplify the tax reporting process relating to benefits in kind.

When does payrolling of benefits in kind start?

From 6 April 2026, employers will no longer need to file P11D and P11D(b) documents with HMRC at the end of each tax year. Instead, they will use their payroll systems to report and collect income tax and Class 1A National Insurance (NI) on benefits in kind, in real time.

These include such perks as company vehicles, self-assessment tax return fees paid by the company, private health insurance, non-business travel expenses, and non-business entertainment expenses. HMRC provides a full list here.

HMRC has said it plans to work with industry stakeholders to produce implementation guidance for employers on the payrolling of such benefits. But it has not yet announced whether mandatory reporting will cover benefits that cannot currently be payrolled, such as loans and accommodation benefits.

What will payrolling of benefits mean for payroll teams?

The introduction of realtime taxation on benefits in kind will lead to more work for payroll teams, particularly during the transition period. A key first step will be to conduct a full review of benefits and existing change reporting processes. Third-party providers and brokers should be included in this review to ensure they are able to meet data reporting requirements before the pay period cut off.

Going forward, employers will also have to consider the most efficient process to receive benefits in kind data so they can accurately process and report it when necessary.

Here are some key questions to ask yourself before you begin the process:

• Who are your providers?
• Are the right processes in place to ensure providers can transfer data to the payroll team in an accurate and timely fashion? How do they intend to do this?
• Does any given benefit apply to employees only or does it include options for family members?
• What is the given benefit’s annual renewal date?
• Can employees make changes as and when desired to the benefit or is there a window that aligns to the holiday or tax year?
• Can you realign any of the benefits you offer to ensure they conform to tax year parameters?

Another consideration for employers is to ensure there is enough cashflow for payroll teams to make the required Class 1A NI payments to HMRC rather than accruing and paying NI contributions annually as was traditionally the case. HMRC has yet to announce whether employers will have to make such payments monthly or for each pay period. Another possibility is that HMRC will still require annual payments with the P11DB being submitted – as it is now for those payrolling benefits.#

What potential problems may payroll teams face?

The biggest impact of the changes will be felt by employers providing benefits that commence at any time other than the start of the financial year.

For example, organisations offering private medical insurance schemes that commence on 1 September will have to provide relevant information to payroll teams before the September pay period cut off. This is currently not required until the April of the following year.

Company cars may also prove to be another problem area due to potential issues in getting hold of the appropriate data. Even today, payroll teams often experience delays in receiving car data, particularly if employees have returned their old car and are using a temporary one while wating for a replacement.

How should payroll teams prepare for the payrolling of benefits?

It‘s important to remember that all benefits in kind will need to be included in payroll.

This will have a potential impact on data management, cashflow and employees. Here are some of the things organisations will need to do to prepare:

• Ensure processes are aligned. Review existing processes and adjust as necessary to conform with the new requirements. Address any challenges related to processing loans, accommodation benefits, and last-minute changes. Engage with external providers, such as lease companies, to ensure they send you relevant data in a timely fashion.
• Mitigate compliance risks. Because income tax will be managed through PAYE, it’s worth being aware that the risk of compliance errors is higher. This means understanding these risks and taking action to reduce them is vital.
• Data management, It’s important to ensure data management is robust when handling realtime reporting requirements. Validate benefits-in-kind data to check it’s accurate, reliable, and available in a timely fashion for payroll reporting purposes. This is particularly relevant in the case of company cars. The aim here is to prevent compliance errors and any resultant penalties or problems with employees’ net pay.
• Ensure appropriate payroll software is in place. Evaluate your current payroll software to ensure it can handle payrolling benefits in kind. Can you upgrade or purchase add-ons if necessary? Also, undertake thorough testing and training to ensure a smooth transition.

Consider switching over early

Some employers might need specialist third-party support in complying with the new rules. For these, it may be worth registering to payroll benefits on a voluntary basis from 6 April 2025.

Doing so could help avoid a rush for skills as the 2026 deadline approaches. A key consideration is that implementation will not be phased. So, the starting point can only be the beginning of the tax year. This will be either April 2025 (voluntary) or April 2026 (compulsory).

How should employers communicate the change to employees?

It’s vital to be transparent with employees about the forthcoming changes as their impact will be significant. Workers will no longer have their tax code adjusted annually. Instead, they will have to pay tax in real time while also catching up with the previous year’s taxable benefit. This initially could lead to cashflow challenges.

As a result, keep people (including unions and employee representatives) in the loop from early on in the process to ensure everyone is prepared.

To this end, it also makes sense to explain the rationale behind the move and the date it will come into force. Clarify any short-term impact individuals may experience in relation to their tax codes and take-home pay.

Explain why payrolling of benefits in kind is good for employees

Provide a question-and-answer document to address any common queries or concerns. Be sure to highlight the positives that payrolling of benefits brings for employees:

• Realtime taxation means that employees can budget more easily, without worrying about build-up of a tax bill through the year
• It reduces the need for HMRC to estimate tax liability.
• Less admin – no need for employees to notify HMRC of changes to their benefits for current year.
• No more P11D paperwork for employees to keep for the required period of time.

Taking a communicative and proactive approach will help to create a smooth transition to the new system. Organisations that get ahead and prepare early are most likely to minimise disruption, cost, and impact on employee experience.

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