HMRC Payroll benefits p11d
16 December, 2024

Are You Ready for the End of P11Ds? What Every Business Needs to Know

HMRC is phasing out P11D forms by April 2026, with all UK employers required to payroll benefits instead. This is a significant tax change and although it might sound like a future concern, smart business owners are already preparing.

This week I was chatting with a client about salary sacrifice arrangements and realised lots of UK business owners find Benefits in Kind (BIK), P11Ds and tax implications confusing. So let’s break down these important HMRC changes in plain English.

Understanding Salary Sacrifice and Benefits in Kind (BIK)

Let’s start with a simple example. Imagine an employee with a salary of £5,000 who sacrifices £1,000 for a benefit.

The reality is:

  • £4,000 is taxed through payroll
  • But they still need to pay tax on the £1,000 benefit
  • This £1,000 is still part of their earnings, just in a different form

Without the sacrifice, they’d pay tax on both the full £5,000 salary plus the £1,000 benefit separately.

P11D Reporting vs Payrolling Benefits: Understanding the Difference

Right now, many businesses use P11Ds to report these benefits. This means:

  • The tax code changes for the following year
  • Employees pay what’s due for 2024-25 throughout 2025-26
  • It’s a bit like paying in arrears

With payrolling, the tax would be deducted as payments happen:

  • Benefits are added as a monthly amount
  • Tax is collected in the same tax year as the benefit is received
  • Everything stays current

HMRC’s 2026 Mandatory Payrolling Benefits Change

From April 2026, P11Ds will be no more. All employers will need to payroll benefits – it won’t be optional.

What does this mean for your business?

During the transition, employees might face a year where they’re effectively paying tax on 2 years’ worth of benefits. This happens because:

  1. They’ll pay the final year of P11D tax through their tax code
  2. While also paying current-year tax on payrolled benefits

Preparing Your Business for P11D Changes: Next Steps

If you’re still using P11Ds, we recommend considering an early switch to payrolling benefits. Early adoption helps:

  • Spread the tax impact for your employees
  • Get ahead of HMRC’s 2026 mandatory change
  • Simplify your benefits administration
  • Ensure tax is collected in the correct tax year

For more information, you can visit the official HMRC guidance on payrolling benefits and expenses.

Want personalised advice on how these P11D changes might affect your Scottish or UK business specifically? Book a discovery call with ValueAdd and we can develop a tailored plan for your transition.