Payrolling benefits in kind – What is changing and when?
On 16 January 2024, HMRC announced that it will become mandatory to payroll taxable benefits in kind and to pay Class 1A National Insurance Contributions (NICs) via payroll. This change is planned to come into effect for all employers from April 2026. In addition, HMRC will introduce a new online service for employees to claim tax relief on business expenses not borne by employers. Their aim with both measures is to reduce administration and simplify the tax system for both employers and employees.
How benefits in kind are reported now
Currently, employers are required to report benefits in kind on a form P11D, which should be submitted to HMRC and provided to employees by 6 July after the end of the tax year. The relevant income tax is then collected by updating the employee’s PAYE Coding Notice or via completion of a Self Assessment tax return.
Employers can currently voluntarily payroll certain benefits in kind, but still need to undertake some reporting after the end of the tax year, such as the completion of an employer return form P11D(b) and payment of Class 1A NICs. Additional administration is required by employers each month when benefits in kind change: for example, on renewal of a private medical scheme or when employees leave. In addition, it is difficult to calculate some benefits each month, especially where employees may contribute to some or all of the cost up to the date where the P11Ds are currently submitted by 6 July. Certain benefits such as beneficial loans and accommodation provided to employees are excluded from voluntary payrolling so that P11Ds are still due. For these reasons, uptake of voluntary payrolling of benefits is currently low.
These issues and more will need to be addressed before all benefits can be payrolled.
The proposed changes
The proposed start date for mandatory payrolling of April 2026 will be challenging given the required consultation, update of legislation and HMRC guidance, payroll software updates and required training for employers.
It is intended that this change will simplify the reporting and collection of income tax and Class 1A NICs arising on benefits in kind. However, it will also mean that the income tax arising on benefits in kind will be paid in full earlier by employees, and it is possible that the due date for payment of the Class 1A NICs by employers could be changed from its current due date of 22 July after the end of the tax year, if paying electronically.
Simplifying claims for business expenses incurred by employees is welcomed, as it should ensure that employees will get relief sooner for expenses that they, rather than their employer, incur. However, the rules as to what employees may personally claim tax relief on are restrictive and complex, and this could lead to employees overclaiming or claiming tax relief to which they are not entitled.
HMRC will provide further details of both measures later in 2024. In the meantime, if you have any queries, please contact our Employment Tax team.
This article was correct at time of publication.