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Phased Implementation of Mandatory Payroll of benefits in kind

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By payrolling benefits, the employer can collect the tax due on benefits in kind in real time via the payroll by adding the cash equivalent of the benefit to the employee’s salary on their payslip. This is instead of the benefit being reported on the employee’s Form P11D and the employee paying tax on the amount in their PAYE coding notice, which is often incorrect as it is estimated based on prior year information.

HMRC planned to move to a system of mandatory payrolling of all benefits in kind from April 2027, a year later than the previously announced date of April 2026.
Whilst payrolling benefits may have advantages in terms of the correct tax being collected in real time, there have been concerns about the practical challenges that need to be overcome by employers and software developers in order to deliver payrolling for all benefits. This includes the need to meet HMRC’s announced Real Time Information (RTI) technical specifications and the ability of employers to obtain information from benefit providers ahead of each payroll run, instead of only being required once per year for Forms P11D.

After dialogue with professional bodies and the software industry, HMRC have announced that there will be a phased implementation of mandatory payrolling of benefits in kind. Mandatory payrolling will now only be required from April 2027 for company cars and fuel, vans and van fuel, private medical insurance and other employer provided medical benefits, which are the most popular benefits (believed to be approximately 92% of all benefits provided in the UK). Other benefits can continue to be reported on Forms P11D, although employers can payroll these on a voluntary basis during the 2027/28 tax year.

Mandatory payrolling of the remaining benefits in kind (with the exception of loans and living accommodation) will be required from April 2028, allowing HMRC the opportunity to consult with the software industry and other key stakeholders about the RTI technical specifications and how they will apply. The mandatory payrolling of loans and living accommodation benefits will not happen until a later date, the details of which are still to be confirmed by the government.
The phased approach is a welcome step, as it will significantly ease the burden for employers in changing their systems compared with what would have been required for mandatory payrolling for all benefits taking place from April 2027. As well as being the most popular benefits provided, those benefits which are included from April 2027 are likely to be the most straight forward in terms of the information being required.

Similar to other tax changes such as Making Tax Digital, HMRC have also indicated that there will be a relaxed approach to penalties, so employers will not be penalised for getting something wrong as they change their systems to accommodate mandatory payrolling of benefits.

Increase in Mileage Rate for 2026-27

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Increase in Mileage Rate for 2026-27

If you need to use your car for work in the UK (not simply just for travelling to or from work) you’ll now be able to claim tax relief on 55p per mile for the first 10,000 miles driven in the tax year. This is up 10p from 45p per mile.

If you drive as part of your work, for example you’re a care worker driving from house-to-house, your employer can cover your costs per mile with what’s called an ‘Approved Mileage Allowance Payment’, on which you pay neither tax or National Insurance.

This allowance has been frozen at 45p per mile for the first 10,000 miles driven in each tax year since 2011. But it has now increased by 10p to 55p per mile, backdated to April 2026.

IMPORTANT CHANGES TO STATUTORY SICK PAY

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Important changes to the Statutory Sick Pay rules come into force on 6th April 2026. These changes will mean ‘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.

The overall cost to employers is likely to increase as a result of the new provisions. Employers should consider:
* Reviewing the sickness absence policies and update where necessary to reflect the new rights and to ensure robust absence management.
* Auditing sickness absence, particularly identifying staff likely to be absent and in receipt of SSP at implementation.
* Updating payroll to reflect the new entitlements.
* Ensuring employees are informed as necessary.

BUDGET CHANGES 2025

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The results of Rachel Reeves’ November budget that will affect your payroll from April 2026 are as follows:

* Income Tax: The thresholds at which the different band of Income Tax kick in will be frozen until 2031.
* National Insurance: The Lower Earnings Limit will increase from £125 to £129 per week. All other thresholds and rates remain unchanged until 2031.
* National Living Wage: This will increase by 50 pence (4.1%) to £12.71 per hour form April for employees aged 21 and over.
The rate for 18-20 year olds will increase 8.5% to £10.85 per hour.
The rate for 16-17 year olds and apprentices increases from £7.55 to £8.00 per hour.

* Dividends: The current Dividend Allowance of £500 remains for 2026-27 but there will be a 2 percentage point rise to the ordinary and upper tax rates on dividend income from April. The additional rate remains unchanged at 39.35%. Dividends received above the Dividend Allowance will be taxed at the following tax rates for 2026-27:
* 10.75% for basic rate taxpayers
* 35.75% for higher rate taxpayers
* 39.35% for additional rate taxpayers
Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the allowance. Dividends are treated as the last type of income to be taxed.

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.