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Mandatory Payrolling of benefits deferred until 2027

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Employers have been given an extra 12 months to prepare for mandatory payroll treatment of benefits in kind. This was originally planned to take place from 6th April 2026, but the new regime will now go live in April 2027. This announcement will be welcomed by many employers, including those that already payroll benefits in kind, as they will now be able to use the 2024/25 and 2025/26 benefit reporting cycles to identify and embed the changes required to transform historical data collection and reporting into real time events.

A benefit in kind is remuneration paid to an employee which is not paid to them in cash. Benefits in kind can be a tax effective way of incentivising and rewarding employees.

HMRC will introduce additional data fields to capture P11D and P11D(b) reporting fields. Whilst we expect payroll providers to be able to accommodate the new fields, gathering the data from providers and sources to support real time reporting is likely to challenge some employers. HMRC expect employers to add benefits during the tax year when they arise, and collect across remaining pay periods. The employer works out what the yearly value of the benefit is, divides this by the number of pay periods in the year and this amount is taxed each period. If there are any changes to the benefit amount throughout the year, the amount can be adjusted. With limited exceptions, form P11D and P11D(b) will no longer be required. Employers providing accommodation and beneficial (interest free or low interest) loans may still be reported via form P11D.

The introduction of mandatory payroll of benefits will not have any effect on benefits reported under a PAYE Settlement Agreement.

IMPORTANT CHANGES TO SSP

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On 1st July, the Government published a roadmap comprising of policy changes to boost rights for half of all UK workers. One of the key announcements of utmost importance to the payroll industry, and in turn to every employer throughout the UK, was the policy change to SSP. These changes will be implemented from April 2026, which means ‘Up to 1.3 million working people will get access to statutory sick pay for the first time. The changes are:

* SSP will be payable from day one.
* SSP to be paid to those earning under the lower earnings limit

SSP from day one
The first 3 waiting days of the period of incapacity to work has been abolished and so SSP will now be payable from day one of sickness. Employers will need to review the period of incapacity for work to calculate entitlement to SSP. So the PIW is not being abolished, but instead, amended, to reflect the new way of calculating SSP.

SSP paid to those earning under the LEL
SSP will be paid to those earning under the LEL, and this will be paid at 80% of an employee’s normal weekly earnings, where 80% of the normal weekly earnings is less than the flat rate of SSP. This does mean that for some employees who earn at or slightly above the LEL, they will be paid a lower weekly rate than before. The DWP stated that the balance comes from the removal of the waiting days, meaning these employees may be paid less per week, but they will be paid from the first day of absence.

Employment Rights Bill 2024

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The Employment Rights Bill 2024 was released in October 2024. The proposed changes mark a significant shift in employment regulation.

Zero-hour contracts
The bill proposes that if a worker is under a zero-hours or minimum hours contract, the employer has an obligation to offer them a guaranteed hours contract based on the number of hours the employee worked during the previous reference period. It’s expected the reference period will be set at 12 weeks.

Unfair dismissal
The bill provides that the qualifying period of service, which is currently 2 years, will be removed for the purposes of ordinary unfair dismissal. This means the employees will have the right to claim the right from day one of their employment. A new statutory probationary period will be finalised through consultation but is expected to be set sat 6 months.

Statutory Sick Pay (SSP)
The bill proposes to implement 2 key changes:
The removal of the 3 day waiting period before being paid SSP on the fourth day of absence.
Extending eligibility for SSP to those earning less than the lower earnings limit.

Fire and rehire
The bill will make the dismissal of an employee based on the refusal to agree to a contract variation automatically unfair. There will be no 2 year qualifying period and the employer cannot hire another person or the same employee under a new contract with new contractual terms but with substantially identical duties.

2024 BUDGET CHANGES

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The new chancellor has delivered her budget statement, which has a number of cost implications for businesses from April 2025.

National Living Wage
The main adult rate of National Living Wage will rise in April 2025 from £11.44 to £12.21 per hour. The hourly rate for 18-20 year olds will rise from £8.60 to £10.00 and 16-17 year olds from £6.40 to £7.55 per hour, an 18% increase.

Employer National Insurance
From April 2025, employers will see the NIC rate rise from 13.8% to 15%, meaning an extra 1.2% on applicable earnings.
At the same time, the threshold at which the employer National Insurance rate kicks in will be lowered to when an employee earns £5,000 rather than the current £9,100. This means an additional £4,100 of earnings will now be subject to the new rate, costing business an extra £615 a year per employee whose earnings exceed the current threshold.
These significant increases will add £700 to the National Insurance costs of a full time employee on the National Living Wage, and over £800 to the cost of an employee on an average wage of £29,800.

Employment Allowance
Currently, businesses with an NIC bill of £100,000 or less in the previous tax year can benefit from the Employment Allowance, which allows them to take £5,000 off their employer NIC bill. This allowance will increase in April to £10,500 and the £100,000 limit will be removed meaning it will be available to all employers.
Whilst this increase in allowance will shield very small employers from the effects of the significant increases in employment costs (a small firm can employ four people on National Living Wage without paying any employer NICs at all) larger employers will feel the pinch, as the higher allowance may not significantly offset the extra cost to them.

Company Directors
Single directors of limited companies who don’t have any other employees will not benefit from the increase in the Employment Allowance. Therefore those paying themselves through payroll, above the new threshold of £5,000, will face a rise in their employer NICs.

MANDATORY PAYROLLING BENEFITS IN KIND

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The government will make the reporting and paying of Income Tax and Class 1A National Insurance Contributions (NICs) on benefits in kind via payroll software mandatory from April 2027, building on the progress already made on the government’s ambition to fully digitalise the reporting of benefits in kind. Mandation will simplify the tax affairs of 3 million people and reduce the need for them to contact HMRC.

This measure will reduce administrative burdens for thousands of employers and HMRC by simplifying and digitising the process of reporting and paying tax on all employment benefits. It will remove the need for 4 million end of year returns to be submitted to HMRC. HMRC will engage with stakeholders to discuss our proposals to inform design and delivery decisions and draft legislation will be published later in the year as part of the usual tax legislation process. HMRC will also work with industry experts to produce guidance, which will be made available in advance of 2026. Further information will be published via usual communication routes, such as through employer bulletins.

Payrolling the Income Tax due on benefits in kind is currently available to employers on a voluntary basis, with those who do not wish to payroll still able to file form P11D at the end of the year. Class 1A National Insurance contributions cannot currently be payrolled so a P11D(b) form still needs to be submitted at the end of the year. In light of the recent announcement HMRC encourages anyone who is able to begin payrolling voluntarily to do so in preparation. Agents will also be able to payroll benefits on behalf of employers from the end of April 2024.

How this will affect employers
If you provide BiKs to your employees, Income Tax and Class 1A National Insurance contributions will have to be reported and paid in real time through payroll software from 6 April 2027. The 2026-2027 tax year will be the last year that we will accept P11Ds and P11D(b)s for annual reporting of BiKs in most cases.
HMRC will help businesses to prepare for the transition by providing guidance in advance of 2026. If you wish to start payroll benefits for 2025-26, you will need to tell HMRC before April 2025 which benefits you want payrolled, or ask us for a form of ‘benefits to payroll’ and we can inform HMRC for you if we are your PAYE agent.