Payrolling of Benefits: Your Guide to the New HMRC Rules

HMRC plans to reshape the scene of payrolling benefits with new mandatory reporting rules from April 2026. These changes will impact all employers and replace the current P11D system that processes about 4 million forms each year.

Currently, P11D forms are submitted by employers by 6 July after the tax year ends. Under the proposed new rules employers will be required to report benefits through payroll with up-to-the-minute data analysis. To do this, employers will need to use the Full Payment Submission (FPS) on or before each payday. Your payroll systems will therefore need to be updated to handle the increased data reporting.

Below we aim to set out HMRC’s new payrolling benefits rules and to help you get your organisation ready and avoid any compliance risks that might come up.

Understanding the New HMRC Payrolling Rules

HMRC’s new mandatory payrolling system will transform tax reporting and payment on employee benefits starting April 2026. These regulations require you to process most benefits through your payroll software and report them via the Full Payment Submission (FPS).

The changes will affect almost all benefits-in-kind although. employment-related loans and accommodation benefits remain voluntary for the 2026/27 tax year. They will eventually become mandatory too, with timelines coming soon.

Payroll Software

Your current payroll software will likely require significant updates to handle the extra data requirements. This is because the new system will need more detailed information than the current voluntary setup. This particularly applies to Class 1A National Insurance Contributions (NICs) reporting and complete breakdowns of payrolled benefits.

There will be a requirement that benefit values be split across relevant pay periods for each employee. These amounts should appear with earnings on payslips to enable immediate tax deductions. Any changes in benefit values during the year require you to recalculate the remaining taxable amount across the leftover pay periods.

The new rules make accuracy crucial. Values must be as precise as possible, with quick corrections for any discrepancies. HMRC will add an end-of-year process to adjust benefit values that couldn’t be determined during the tax year.

As such detailed records throughout the tax year become essential for benefits management. These records ensure accurate reporting and help comply with new requirements. HMRC will watch penalty positions between April 2026 and April 2027 as employers adapt to the new system.

It is hoped that these changes will prevent 4 million people’s Income Tax from being collected in arrears, ensuring they pay correct tax on time. The modernisation makes the process simpler for employers and HMRC by streamlining employment benefits’ reporting and payment.

Setting Up Your Payroll System

Your payroll system will need a proper review and planning of implementing the necessary changes. Things to look out for:

1. Make sure your payroll software can handle immediate reporting and tax calculations for benefits-in-kind (BIKs). The software should support basic features like producing payslips, recording pension deductions, and managing different payment periods.
2. Make sure you have robust processes to to collect and prove benefit values right each month. This is essential as the new system demands precise data management and quick corrections are necessary when benefits information becomes available. You should therefore set up clear protocols to source benefit data, especially when it’s stored in multiple systems.
3. Make sure your system will need to be able to handle benefit value changes throughout the year and recalculate remaining taxable amounts.
4. Class 1A National Insurance Contributions calculations will need special attention. Your system should track the final year-to-date value of payrolled benefits and their NIC classifications correctly. We suggest therefore that checks are added to verify that employees have paid their required benefit costs.
5. More complex benefits like company cars with different fuel types or personal mileage reimbursements will need precise information from your payroll team. To ensure this is gathered again we recommend you create procedures to handle benefit changes for employees who leave before payroll deadlines.

The 2025/26 tax year gives you a chance to test your setup. This transition period helps you verify system functionality with existing P11D forms. Keep complete records of provided benefits to support accurate reporting and meet new requirements.

Of course, if you need help setting up a payroll system, or would like to outsource your payroll, please get in touch with us at WCL.

Managing Employee Communications

When the changes are implemented, it will be essential to communicate with your employees to explain the changes. Written notification should be sent to your staff explaining the changes and what it all means after registering for payrolling benefits. These updates can reach employees through payslips, emails, or formal letters.

In particularly, your written notices should specify the payrolled benefits, their cash equivalents and which ones fall under PAYE tax. The notice should also list benefits outside the payrolling system. The payrolled amounts need clear documentation for optional remuneration arrangements to maintain transparency.

Any communication in the first year should also include the following:

• Notification that their tax codes will change to remove benefit-in-kind modifications;
• The fact that tax adjustments will appear in monthly payroll; and
• Year-end statements will show their total taxable benefits.

New employees with payrolled benefits will also likely require clear guidance about tax code changes from previous employment benefits. You will likely need to explain that new benefits won’t show in their tax codes, but existing code adjustments for underpaid tax will stay.

On an annual basis, staff should receive detailed breakdowns of payrolled benefits by June 1 after each tax year. This helps employees complete their self-assessment returns with accurate information. Note that non-payrolled benefits on P11Ds need separate reporting on self-assessment forms.

Prior to the changes, you may wish to consider support sessions/meetings with your employees. These meetings can address concerns about up-to-the-minute tax deductions and payslip changes. This proactive approach will reduce confusion and smooth the transition to the new system.

Conclusion

Payrolling benefits marks a major move from traditional P11D reporting. Your systems and processes need proper preparation to ensure a smooth transition before April 2026. This gives you enough time to adapt.

Early changes to your payroll software will help avoid last-minute issues. You should test your setup during the 2025/26 tax year to ensure accurate benefit calculations and up-to-the-minute reporting. A reliable data management system will help maintain precise records throughout the tax year.

Your team needs to understand how these changes affect their payslips and tax calculations. Create a complete communication plan before the mandatory switch to keep everyone informed and prepared.

Accuracy is crucial under these new rules. Regular system checks, quick corrections, and detailed record-keeping will help you stay compliant and avoid penalties. The transition might seem challenging at first, but these changes will make benefit reporting more streamlined. This ensures employees pay the right tax at the right time.

If you’re worried about what’s involved, have questions or would like to outsource your payroll, please get in touch. We’d love to hear from you.