Payrolling of Employee Benefits

HM Revenue & Customs (HMRC) have been encouraging employers to consider payrolling the taxable benefits they provide for their employees. 

The advantage of this is that the benefits are reported during the year with tax being collected in real time through payroll.

This then means that there is no change to their PAYE tax code (which determines how much tax is withheld at source via payroll) and so the amount they are taking home should be the correct amount. 

When operated correctly, payrolling benefits can lead to administrative efficiencies for employers as you will no longer need to complete P11Ds for each employee.

However, you need to make sure that the rules are applied correctly as otherwise this can lead to a greater amount of administration to sort out the issue.   

UPDATE - Please note that HMRC has announced that it will become mandatory for employers to report employee benefits through payroll from 6 April 2026. 

Please refer to our Mandatory payrolling of benefits from 2026 article for more information on the proposed changes and actions employers will need to take ahead of April 2026.

Employers who do not currently voluntary payroll their employee benefits may want to consider transitioning to the new reporting regime on a voluntary basis for the 2025/26 tax year, before it becomes mandatory in 2026/27. This will give employers time to ‘test’ the system and their processes ahead of the changes. 

Although the process will remain largely the same from April 2026, please note that this article only includes guidance on the voluntary payrolling of benefits. For more information on the mandatory payrolling of benefits and upcoming changes, please refer to the article included above.

What benefits can be voluntary payrolled?

You can currently voluntary payroll all benefits except for employer-provided accommodation and beneficial loans (interest free or low interest loans).  If you have these benefits, you can still register to payroll any other benefits, but P11Ds will need to be completed to report the accommodation and beneficial loan benefits.

It is open to employers to decide which benefits to payroll. It is also possible to exclude particular employees, so the system is flexible. 

As mentioned above, if you decide to payroll all employee benefits, you will not need to prepare P11Ds at the end of the year. In addition, where company cars are payrolled, no P46(Car) is required to be filed.

A form P11D(b) is still required in order to calculate and pay the Class 1A national insurance due. 

How do I register?

To voluntary payroll benefits, you need to register with HMRC before the start of the next tax year with details of the benefits you wish to payroll.

To use this method for the 2025/26 tax year, you’ll therefore need to register online by 10pm on  5 April 2025.  

We would recommend that you check that the payroll software you use is suitable before registering. 

You can register online here

What happens next?

Once you have registered, you will need to give written notification to your employees so that they are aware their benefits are being taxed through the payroll.

The employer works out what the yearly benefit is, divides this by the number of pay periods in the year and this amount is taxed each week/month.  If there are any changes to the benefit amount throughout the year, the weekly/monthly amount can be adjusted.  

At the end of the tax year the employer will need to work out the total value of the benefits provided in the tax year and the associated Class 1A National Insurance liability.  

They will also need to complete and submit form P11D(b) by 6 July following the tax year end.  

What are possible complications?

On registration of the scheme, HMRC should remove the value of the benefit from the affected employees’ PAYE code, otherwise double deduction will occur. Therefore, to ensure this does not happen, we would advise that you register with HMRC in good time prior to the start of the tax year in order to ensure any adjustments take place. 

PAYE rules state that employers cannot deduct more than 50% of an employee’s pay in tax. Therefore, if an employee’s pay decreases significantly (i.e. sick leave or maternity/paternity leave), this may mean it is no longer appropriate to payroll the benefit. 

You may not know the value of the benefit to be payrolled at the start of the year. In this case, a reasonable estimate can be used at the start of the year. This would need to be adjusted once the exact value is known. 

Benefit changes during the year can also lead to complications due to having to recalculate the value of the benefit for the employee. This is based on the date of change and can lead to PAYE failures and communication issues with employees due to a misunderstanding of how this works. 

Benefits covered by Optional remuneration agreements can also be problematic as you need to understand the value of the benefit to be used (i.e., the higher of the salary foregone or the cash equivalent of the benefit). Care will need to be taken here. 

Informal Payrolling of Benefits

HMRC has confirmed that it will no longer be accepting any new informal payrolling benefit arrangements as of 6 April 2023.

Previously, if you missed the deadline for registering to payroll benefits, you could apply to HMRC to informally payroll your employees’ benefits. This option was no longer available from the start of the 2023/24 tax year.

Also, any employers who had an existing informal payrolling arrangement in place at this date should have now formalised their agreement and registered with HMRC.

Further information

If you want any further information on payrolling benefits, please contact your normal Bishop Fleming contact or a member of the Employer Solutions team.