United Kingdom | Employment Tax | Payrolling of benefits to become mandatory

Employment Tax

Payrolling of benefits to become mandatory Key considerations for employers

Summary
The UK government recently announced that the payrolling of benefits will be mandatory from April 2026. We have summarised below some of the key considerations for employers, both in relation to the domestic population and mobile workers.

The Details

Current position

• In the absence of any other arrangement, any taxable benefits and certain expenses provided to employees should be reported on an employee’s Form P11D for tax purposes
• Most benefits attract a Class 1A (employer only) National Insurance (NI) liability. Any benefits subject to Class 1A must be reported via Form P11D(b)
• Subject to formal agreement from HM Revenue & Customs (HMRC), since 6 April 2016, employers can voluntarily elect to payroll certain benefits in kind, thereby removing the requirement to report these benefits on Form P11D
• The value of any benefit subject to Class 1A NI still needs to be reported via Form P11D(b) for Class 1A purposes
• Currently, neither employer provided living accommodation nor employment related loans can be payrolled

What’s changing

• As part of a package of measures to support its ambition to simplify and modernise the UK tax system, the government confirmed it would mandate the reporting and paying of income tax and Class 1A NI on benefits in kind via payroll software from April 2026
• Whilst there is little detail published to date:
  • HMRC will engage with stakeholders to discuss the proposals and inform design and delivery decisions
  • Draft legislation will be published for consultation later in the year as part of the usual tax legislation process
  • HMRC will work with industry experts to produce guidance to be made available in advance of 2026
  • Further information will be published via usual communication routes, such as employer bulletins

What does this mean

There are a number of details and complexities that will need to be considered in advance of April 2026, including:

Whether/ how loans and accommodation will be included

Whether Class 1A will be collected in ‘real time’ each pay period

How ‘irregular’ benefits or items with a fluctuating value should be reported

Whether there will be any change to how payrolled benefit errors are corrected

Whether the limit on the amount of tax that can be withheld in a pay period will remain

With whom the burden for any uncollected tax will rest (HMRC or employers)

Whether there will be any changes to payslip presentation and if/ how class 1A will be displayed

How the regime will apply to mobile workers, in particular the modified payroll process

The interaction between the 52 week NI rule and class 1A on payrolled benefits

Whether any employers, items and/or employees can be carved out

Whether forms P11D/PAAD(b) will remain for some items/ employers or disappear

We understand the potential practical, commercial and employment tax challenges for businesses looking to payroll benefits. In preparation for 2026, Vialto can support you with the below.

Understand the impact of the change on your business and key actions the business needs to take to prepare	Assist with the scheme design, including practical payroll considerations	How to identify and report taxable items in real time	Consider the interaction with current expense processes	Consider the impact of any changes to the timing of Class 1A NI payments
Consider potential additional practical challenges arising for more frequent pay periods (e.g. weekly)	Identify where existing processes can be used/ developed and which/ how processes need to be updated	Consider the interaction with salary sacrifice arrangements	Consider the impact of the Optional Remuneration Arrangement rules on the value of benefits	Consider the impact on payroll specifications and reviewing payroll output
Consider the impact of the shorter timescale in which items needs to be made good on the taxable value of any benefit	Consider the interaction with PSA processes and whether any additional categories may be beneficial	Consider the potential impact on employee’s tax codes	Prepare/ review supporting documentation and employee communications	Review/ amend documents (e.g., HR policies, benefits documents) to support effective payrolling

Employers already payrolling benefits may also need to take steps to prepare for 2026, including:

1. Considering how any benefits not currently payrolled will be brought into the regime
2. Considering how any employees currently carved out of the regime could be brought into the regime
3. Considering how to identify and report all taxable items in real time
4. Considering the impact of any changes to the timing of Class 1A NI payments
5. Considering the impact on any modified payrolls/ mobile workers
6. Considering whether any communications should be issued to employees
7. Reviewing the efficacy of current policies and processes and how these should be updated

Contact us

Ash Majithia
+44 (0) 7483 341772

Sarah Hewson
+44 (0) 7483 459720

Trereve Jopson
+44 (0) 7857 457029

Further information on Vialto Partners can be found on our website: www.vialtopartners.com

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Vialto Partners (“Vialto”) refers to wholly owned subsidiaries of CD&R Galaxy UK OpCo Limited as well as the other members of the Vialto Partners global network. The information contained in this document is for general guidance on matters of interest only. Vialto is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Vialto, its related entities, or the agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this document or for any consequential, special or similar damages, even if advised of the possibility of such damages.

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Further information on Vialto Partners can be found here: www.vialtopartners.com

Vialto Partners (“Vialto”) refers to wholly owned subsidiaries of CD&R Galaxy UK OpCo Limited as well as the other members of the Vialto Partners global network. The information contained in this document is for general guidance on matters of interest only. Vialto is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Vialto, its related entities, or the agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this document or for any consequential, special or similar damages, even if advised of the possibility of such damages.

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