Need to know:
- Employers should start planning now for the P11D changes to the reporting and paying of tax and Class 1A national insurance contributions (NICs) on benefits in kind, to ensure a smooth transition to the new system in April 2026.
- Potential employer costs relating to the changes include updating existing payroll systems to ensure a smooth integration with HM Revenue and Customs and other financial systems, and training or educating staff in the new system.
- Communicating the forthcoming changes to employees is crucial to ensuring they understand how the new system could affect them.
In January this year, the government announced changes to the reporting and paying of tax and Class 1A national insurance contributions (NICs) on benefits in kind. From April 2026, taxing benefits through payroll will become mandatory, which means employers that report their benefits on forms P11D will have to amend their payroll systems and processes accordingly.
The benefits can be almost anything provided to employees except cash. Although the changes will not happen until April 2026, employers are advised to start planning now, because they will need to invest more time, money, and resources to manage the increased reporting requirements and ensure all relevant benefits are captured accurately.
Clair Williams, tax partner at Azets UK, says: “The financial increase includes additional costs related to software, training, and potentially recruiting additional staff to manage the new processes. Real-time reporting and NIC payments might impact cash flow management within the organisation.”
Integrated systems
Employers must also ensure their payroll systems are integrated with other HR and financial systems, including HM Revenue and Customs (HMRC), which could otherwise increase the risk of errors in reporting “This could lead to potential penalties and fines from HMRC for inaccurate or late submissions, particularly as some benefit-in-kind arrangements are complex and non-standardised,” adds Williams.
There may be some challenges for employers. Simon Wright, audit and compliance manager at Activpayroll, says: “They need to calculate the value of their benefits before the start of the tax year, unlike the current process where the benefit figures are only required at the end of each tax year. The benefits must be set up correctly within the payroll system to ensure that employees pay the correct level of tax on their benefits within the tax year. Currently, employers pay Class 1A national insurance at the end of the tax year and must file a P11D (b) summary form along with the individual P11Ds.”
Salary sacrifice impact
One area that could see a big impact is company cars. Employers that operate a car salary sacrifice arrangement may find payrolling the benefit directly will mean a simpler way of notifying HMRC about car benefits, says Cheryl Clements, regional development manager at Tusker.
“Previously there has been some confusion about whether employers should operate a manual P46/P11D process to notify HMRC of car benefits specifically, or payroll the benefit impacting how much tax is paid and how much pay employees take home,” she says. “The current P46 process can lead to delays in setting up the benefit-in-kind process with HMRC, and as a result, tax may not be deducted in the correct month.”
For car schemes in particular, employers should create their own deadline of April 2025, one year ahead of the change, to give them time to work through any complexities, says Clements “Getting it wrong has many ramifications for an organisation and its employees, such as increased workloads and costs for employers and incorrect pay being made to employees,” she says. “Having the conversations now will help avoid any issues later.”
The biggest impact will be for those with mid-year data changes, which do not start on 6 April, says Cybill Watkins, group product legislation manager at Zellis. “Many with private medical insurance (PMI) may have a scheme commencement date of 1 September, for example, and occasionally some negotiations around price may go on after this date,” she explains. “This change of data information would have to be with payroll before the September pay period cut-off, whereas for now it’s not needed until April of the following year.”
Plan now
Watkins’ advice to employers is to review their whole benefits package and process, be clear about who the suppliers are, the annual date for renewals, and whether employees can make changes at any time, or only during a window to align to holiday or tax year. “They need to ensure that the data transfer to the payroll team can happen on time and accurately and ascertain how the provider intends to get this data to them in the first place,” she adds.
Informing employees about the upcoming P11D changes, with a focus on how take-home pay might be affected, is crucial to avoiding potential misunderstandings that can lead to dissatisfaction if the changes are perceived negatively.
“With clear explanations of any changes in the way benefits are reported and taxed, employees will be better prepared to comply with any new requirements, for example, providing necessary information for accurate reporting,” says Watkins. “It’s also an opportunity to provide staff with access to resources where they can get information about the changes independently.”
