What Mandatory Payrolling Will Look Like

Understanding Mandatory Payrolling

Mandatory payrolling requires employers to manage taxable benefits provided to employees directly through the payroll system. This involves treating the taxable amount of the benefit as an additional salary and deducting the corresponding tax from the employee’s cash pay. By doing so, employers can bypass the need to report these benefits to HMRC through the P11D process at the end of the year. However, they must still account for these benefits when calculating the employer’s Class 1A National Insurance liability on their P11D(b).

The Transition to Mandatory Payrolling

Currently, payrolling taxable benefits is optional. Employers who wish to adopt this approach must register before the start of the tax year in which they intend to begin payrolling; mid-year enrollment is not allowed. Starting on April 6, 2026, payrolling will become mandatory for almost all taxable benefits. During the Autumn 2024 Budget, the Government confirmed this shift and provided further details on the implementation.

Excluded Benefits

The mandatory payrolling will cover all taxable benefits in kind, except for employment-related loans and employer-provided living accommodation. While it is not currently possible to payroll these benefits, voluntary payrolling will be available starting April 2026. Employers can choose to payroll these benefits voluntarily or continue reporting them via the P11D process. From the 2026/27 tax year onwards, all other benefits must be payrolled, with employment-related loans and living accommodation to be included in mandatory payrolling at a later date.

Calculating the Taxable Amount

Employers need to determine the cash equivalent of the benefit to be payrolled and divide it by the number of pay periods in the tax year. For monthly paid employees, one-twelfth of the cash equivalent will be taxed through the payroll each month. If the cash equivalent changes during the year, such as when an employee changes their company car, employers must recalculate the cash equivalent value and adjust the payrolled amount accordingly for the remainder of the tax year.

End of Year Adjustments

Employers must ensure that the reported values for taxable benefits in kind are as accurate as possible, making corrections promptly if the value changes year. An end-of-year process will be introduced to handle amendments for taxable values of benefits that cannot be determined during the year. Details on this process will be provided later.

Enhanced Reporting Requirements

With mandatory payrolling, employers will need to provide more detailed information compared to the current voluntary system. From April 2026, Class 1A National Insurance contributions on benefits in kind will also be collected through the payroll rather than after the end of the year. The reporting requirements will be expanded to support this change and to offer a more detailed breakdown of payrolled benefits in kind.

Partner Note

For more information, please visit the official government publication:

www.gov.uk/government/publications/reporting-and-paying-income-tax-and-class-1a-nics-on-benefits-in-kind-in-real-time/confirming-plans-to-mandate-the-reporting-of-benefits-in-kind-via-payroll-software-from-april-2026.

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