Payrolling of benefits is a method whereby employers process employee benefits through the payroll system, ensuring that the tax on these benefits is calculated and deducted in real-time. Under HMRC’s guidelines, payrolling benefits involve determining the cash equivalent value of benefits provided to employees. This value is computed after subtracting any employee contributions, often referred to as "making good."

In April 2026 - Payrolling of Benefits - What You Need to Consider,Jo Marshall explains that ordinarily, benefits would be declared on form P11D at the end of the tax year. However, with payrolling, this process shifts to the beginning of the tax year, streamlining how the benefits are taxed. For example, if an employee receives private medical insurance, the estimated annual benefit value (say £600) would be divided by the number of pay periods (12 months), resulting in a monthly taxable amount of £50. Thus, employees face incremental, manageable tax deductions throughout the year rather than a lump sum adjustment later.

Advantages of Payrolling

Payrolling benefits come with several significant advantages for both employers and employees, primarily driven by a system that offers greater efficiency, visibility, and accuracy. Here are the key advantages:

1. Elimination of P11D Process: One of the most prominent benefits of payrolling is the removal of the P11D form submission, which simplifies administrative tasks for employers. Historically, employers had to compile detailed accounts of all employee benefits at the end of the tax year. By switching to payrolling, this step is integrated into regular payroll activities, potentially reducing errors and saving time.

2. Real-time Taxation: Employees pay taxes on their benefits as they receive them, distributing the financial impact over the entire year. This real-time aspect means that should an employee leave the company, their tax obligations related to benefits end immediately with their employment. Unlike the P11D process, which can sometimes extend tax adjustments into subsequent jobs, payrolling provides a clean, immediate cut-off.

3. Enhanced Visibility for Employees: With payrolling, employees have immediate and continuous visibility of the taxes they are paying on their benefits. This is reflected on their payslips, allowing them to understand better and manage their personal finances. They can provide feedback to employers about the benefits they receive, enabling companies to adjust and tailor offerings to better meet employee needs and preferences.

4. Improved Administrative Efficiency: For payroll administrators, payrolling simplifies the process by integrating it into regular payroll cycles. Even though it may extend payroll processing initially by including these additional calculations, it reduces the year-end workload significantly by eliminating the need for separate P11D processing and submission.

5. Predictability and Foregoing of Late Adjustments: Because employees and employers deal with benefit taxation in real-time, there is greater predictability and fewer surprises regarding tax liabilities. HMRC benefits too, as it facilitates smoother tax code adjustments free from speculative predictions based on previous years.

Implementation of Payrolling Benefits

1. Registration with HMRC: Employers must notify HMRC if they intend to adopt payrolling for benefits. This often occurs before the start of the new tax year. Proper registration helps ensure that predicted benefit values are accurate and consequently mirrored correctly in PAYE codes.

2. Calculation of Cash Equivalent Values: At the start of each tax year, employers calculate the cash equivalent values of anticipated benefits. These include employer-provided perks such as private medical insurance, company cars, or gym memberships. Each benefit's annual estimated cost is evenly divided across pay periods to determine the monthly taxable value.

3. Regular Payroll Updates: Benefits are included in payroll calculations each pay period. Using advanced payroll software that complies with HMRC's Real Time Information (RTI) specifications ensures that required data is submitted accurately and timely. The software captures any relevant changes, such as new benefits or adjustments in estimated values.

4. Exclusion of Certain Benefits: It's important to note that not all benefits can be payroll processed. Currently, benefits such as living accommodation and loans are exempt from payrolling due to their complexity. These nuances must be considered when setting up a payrolled benefits system.

5. Continuous Feedback Loop: As benefits are reported and taxed in real-time, employees have the unique advantage of seeing immediate tax impacts. This transparency can spark dialogues between employees and employers, encouraging feedback that businesses can use for refining benefit packages.

Payrolling of benefits offers a streamlined and efficient method of managing employee benefits taxation. Eliminating the need for cumbersome year-end processes and providing employees with clearer visibility and timely taxation can significantly enhance both administrative efficiency and employee satisfaction. While certain benefits are not currently included in this framework, payrolling as a system underscores a forward step in modernising payroll operations. Employers considering this transition must ensure their payroll systems are adequately prepared and compliant with HMRC guidelines, paving the way for a seamless and productive adoption of payrolling benefits.

For the full session, please click here. In this course, Jo Marshall covers the following topics:

• The session will cover an introduction to payrolling benefits.
• The voluntary option and how this currently works.
• Delving into the mandatory requirements, and what impact this will have on businesses and payroll bureaus.
• Examples of calculating CEV and processing this in the payroll, managing benefit changes and renewal prices mid-year.
• Project planning and considerations working towards April 2026 go live.

The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.