There’s a major shake-up on the horizon when it comes to how employee benefits are taxed.
If you’re an employer, you’ll want to get ahead of the curve. Let’s break down what’s changing, why it matters, and what you need to do next.
A quick recap on how employee benefits currently work
Since 1976, employers have reported taxable benefits like company cars and private medical insurance through a form called the P11d. The system has moved online, but the overall process hasn’t changed much in nearly 50 years.
In the 2023/24 tax year alone, HMRC estimated that UK employers handed out around £9.1 billion worth of taxable benefits, up by £700 million from the previous year.
That equates to around £5 billion in Class 1A National Insurance Contributions. With employee benefit packages on the rise, those numbers are only going one way.
What’s changing?
From 6 April 2026, HMRC is shifting to a new system where the tax on employee benefits is deducted in real time via payroll. That means:
- No more end-of-year P11d submissions (for most benefits).
- Tax on benefits will be collected through monthly payroll, just like salary and National Insurance.
- It’s a big step toward simplifying tax for employees and giving businesses more up-to-date reporting responsibilities.
Why this matters
For employers this change means you’ll need to:
- Notify your payroll team of any benefits provided, such as medical insurance, gym memberships, and company cars.
- Calculate and report the cash equivalent value each month (for example, £600 per year for medical insurance would be reported as £50 per month on the payslip).
- Deduct tax automatically via PAYE.
- Provide an end-of-year benefits statement to employees.
Not all employee benefits are included. Living accommodation and beneficial loans, including overdrawn Directors’ Loan Accounts, must still be reported through the traditional P11d system.
Your employees will:
- Pay tax on benefits at source, directly through their payslip.
- Avoid delays and overpayments associated with waiting for tax code adjustments after a change or leaving a role.
- Need to be aware that the taxable value of benefits will increase their total income, which could affect eligibility for things like free childcare or result in a move into a higher tax band.
What you need to do now
Employers who want to get ahead can voluntarily opt into this new system for the 2025/26 tax year. To do so, you’ll need to register through the Government Gateway by 5 April 2025.
If you’re already using payrolling of benefits, it’s worth letting your advisor know, so the right systems are in place before the full rollout.
HMRC is expected to release more detailed guidance on the mandatory changes later this year, so keeping up to date will be important.
Need support with the changes?
This is one of the biggest updates to employee benefit taxation in years, and preparation is key.
Whether you’re looking to opt in early, understand your reporting requirements, or simply want to know how this impacts your team, we’re here to help.
Reach out to the Blu Sky payroll team, we’ll help you put the right processes in place and make sure everything runs smoothly.
