Payrolling benefits in kind

When transitioning from P11D reporting to payrolling benefits in kind, there’s often an overlap that leads to two years of benefits in kind being taxed twice in the same tax year. This can cause confusion for both employers and employees and this post explains why this occurs, what steps employers need to take, and how to manage upcoming changes.

Why does double taxation occur?

Double taxation happens due to the timing difference between P11D reporting and payrolling benefits in kind. P11D forms report benefits in arrears, covering benefits provided in the previous tax year. Meanwhile, payrolling benefits in kind taxes benefits in real time, in the same period they are provided.

In the transition year, this timing mismatch means employees can be taxed twice –once for prior-year benefits reported through P11D that are being collected via the tax code and again for current-year benefits taxed through payroll.

How employers can manage the change

Employers can guide their employees to report their benefits directly through their personal tax account, either by using the government gateway online or by contacting HMRC. This approach will help align their taxation with the current period and prevent any overlap in the following period.

Voluntary early opt-in: April 2025

Employers can voluntarily opt into payrolling benefits in April 2025, one year before the change becomes mandatory in April 2026. To opt in early, employers must notify HMRC before April 2025. Early adoption offers several key advantages:

• Smoother transition: Employers can familiarise themselves with the payrolling system before it becomes compulsory, reducing administrative stress.
• Improved payroll accuracy: Payrolling benefits allows for real-time tax deductions as benefits are provided, keeping employees' tax liabilities up to date.
• Administrative simplicity: By integrating benefits into payroll, employers can avoid the complexity of year-end P11D submissions, streamlining the process and reducing administrative burden.

Payrolling benefits in kind will be mandatory from April 2026

Employers should be aware that payrolling benefits in kind will become mandatory, starting in April 2026. From this date, benefits must be taxed through payroll in real time, replacing the traditional P11D system. Employers who opt in voluntarily in April 2025 will have a head start in adjusting their processes and ensuring compliance.

Support for transitioning to payrolling benefits

Our skilled Payroll team can help employers with setting up payrolling benefits in kind, ensuring a smooth transition and making sure you’re compliant. For employers looking to reduce the burden of payroll management, our Outsourcing team can take over full payroll operations, allowing businesses to focus on their core activities.

Preparing for the transition

For support in setting up payrolling benefits or exploring full payroll outsourcing solutions, we’re here to help. Larking Gowen offers comprehensive services tailored to meet your needs, so please get in touch with our team on 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Dannielle Chapman