Payrolling benefits: a game changer
In January 2024, the government unveiled a series of measures aimed at streamlining and modernising the tax system, with a heavy emphasis on technology to boost productivity within the public sector.
One stand-out? The mandate for payrolling benefits in kind, effective April 2026. This bold move aims to simplify tax procedures, cut administrative red tape, and propel businesses into the digital age of payroll processing. Let’s dive into the details and unpack what this means for UK employers.
When does the switch to mandatory payrolling kick off?
The shift towards mandatory payrolling marks a noteworthy departure from the traditional reporting methods, ushering in an era of real-time tax management. Employers will, as of April 2026, report and collect Income Tax and Class 1A National Insurance Contributions on benefits directly through payroll software, eliminating the need for year-end submissions to HMRC all together.
While payrolling benefits has been an option since 2016, the upcoming mandate highlights the urgency for those yet to play catch-up and adopt this practice.
Transitioning to payrolling benefits ahead of the April 2026 deadline will not only streamline reporting processes for businesses but also positions employers for greater compliance and efficiency in the digital age. In essence, there’s no time like the present!
What should employers keep in mind?
As HMRC collaborates with industry stakeholders to fine-tune the implementation process, we encourage that employers proactively prepare for the impending changes with several considerations in mind:
- Flexibility and impact. Prepare to include all benefits and employees in payrolling, keeping in mind the potential impact on data management, cash flow and your employees. HMRC’s consultation with stakeholders will shed some light on whether certain benefits, like loans and accommodation, will be included in the mandatory scheme. Cash flow will also need to be considered for the monthly payment of Class 1 A NIC’s, as opposed to the current lump sum paid 4 months after year-end.
- Data management. Real-time reporting demands robust data management. Ensure benefit data is accurate, reliable, and readily available for payroll reporting to prevent compliance errors and potential penalties. This is especially poignant around company cars.
- Compliance risks. With income tax managed through PAYE, the stakes for compliance errors are higher. Stay vigilant and ensure that payroll systems are equipped to handle the complexities of payrolling benefits.
- Communication. Be transparent with your employees about the change. Communicate the rationale and provide a support platform to address questions or concerns. Inform them of any short-term impact around real-time taxation and provide a run-down of the previous year’s taxable benefit, whilst also highlighting the positives from it.
- Payroll preparedness. Evaluate current payroll software for compatibility with payrolling benefits and anticipate with any necessary upgrades. Thorough testing and training will facilitate a smooth transition.
- Process alignment. Address challenges related to processing loans, accommodation benefits, and last-minute changes. Review existing processes and adjust as needed to align with new requirements. Engage with any external providers such as the lease company to ensure receipt of data in a timely fashion. It’s also recommended that you strategise communicating the benefit package to your employees by 1 June each tax year.
Looking ahead
As we navigate the transition, it’s crucial to approach it with the right mindset and tools to ensure compliance. Just like adopting agile methodologies, embracing this change requires a shift in perspective and a commitment to continuous improvement.
But it’s not just about compliance – it’s about setting ourselves up for success in the long run. By investing time and effort into getting the right technology and processes in place, we can ensure smoother operations and happier employees.
Visit our Knowledge Centre for more information on upcoming Payroll and HR legislation. Alternatively, read the HMRC guidance surrounding Payrolling benefits.
