Mandatory Payrolling of Benefits – Double tax in 2026/27

but it should if you provide benefits to your employees and are not currently using the payrolling mechanism. Employees will be affected adversely by this measure in its first year of operation.

Who does it affect?

All employers who are managing the payrolling of any benefits for its staff.

What do you need to know?

The Payrolling system collects tax on benefits in real time from employees. Using the monthly payroll, the benefit value is added to the employee’s gross pay so that an additional amount of tax on the benefit is collected each month.

The advantage of this scheme is that employees do not accumulate a tax bill on the benefits. Without payrolling of benefits the employee receives a form P11D after the tax year end which reports the benefits they have received to HMRC. HMRC calculate the tax due and adjust the employee’s tax codes in the following tax year to collect the tax due.
Example:

• Employee has a taxable benefit in the 2025/26 tax year.
• The taxable benefit value is say £6,000.
• By 6 July 2026 the employee receives a form P11D which is also sent to HMRC. HMRC calculate the tax due (say £6,000 x 40% = £2,400) and adjusts the employee’s tax code in around August 2026 by reducing it so that the £2,400 tax due is collected, probably at a rate of around £200 per month.
• In April 2026/27 the employer begins the mandatory payrolling of the 2026/27 benefit and collects tax on 1/12th of the benefit each month £6000/12 x 40% = £200 per month.
• The result is that in 2026/27 the employee is paying £200 per month in tax on the payrolled benefit and suffers the reduced tax code which is collecting approximately £200 of tax due on the 2025/26 benefit. This is effectively a double tax hit in 2026/27, with the employee in this example paying tax of £400 per month instead of £200.
• By year two 2027/28, the problem goes away, but in 2026/27 the employee’s take home pay will reduce.

There is little to recommend payrolling to employers in terms of reduced administration, in fact it generally increases administration as the amount payrolled should be kept under review and a year-end reconciliation of the benefit value against the amount payrolled should be undertaken. HMRC of course collect the tax earlier which is no doubt of benefit to the Government. HMRC say in their guidance:

If you use the service you:

will not need to use form P11D
must still work out the Class 1A National Insurance contributions on benefits and complete form P11D(b)

Just to be clear, HMRC says: “employers will not need a P11D for each employee”, but this is true only if they have payrolled the right amount. Employers should take steps to ensure they are properly managing the payrolling of any benefits and consider the following:• Do you regularly review the amounts payrolled? For example, with private medical insurance the premiums will generally change at renewal each year.

• Do you advise payroll of the changes for premium increases or for the addition or removal of dependents or adding new employee joiners?
• Do you check you have payrolled the right amount by the end of the tax year?
• Do you check that for leavers the final payroll run has the correct payrolled total for the tax year? It is virtually impossible to correct this after the P45 has been issued.
• Don’t forget to submit the P11D(b) to account for the Class 1A NIC due on the total benefit value. We have seen examples where employers have overlooked the P11D(b) filing because they misunderstood “no P11Ds needed”.

What should you do next?

Clearly the impact on the employee depends on the value of the benefits, but in some cases, this may cause a significant difference to take-home pay in year one of operation 2026/27. We cannot identify any way that HMRC can mitigate this anomaly when the final proposals for this change are completed.

If nothing else, you should consider warning employees about this. The only realistic action for an employee to take to avoid this effective double tax is to opt out of the benefit for the 2025/26 or 2026/27 tax year.

This is not a fair result for the employees in a cost-of-living crisis. The HMRC Charter is a legal requirement under the Finance Act 2009. The legislation states that the Charter ‘must include standards of behaviour and values to which HM Revenue and Customs will aspire when dealing with people in the exercise of their functions’. This includes treating taxpayers fairly. It surely cannot just be about day-to-day interactions with HMRC, it must include fair policy decisions too.

Contact us

If you would like to discuss the above matter, or to confirm how this impacts your company, please get in touch with your usual Blick Rothenberg contact, or Robert Salter using the form below.