Reporting 2025/26 expenses and benefits

 Reporting obligations arise where an employer provides taxable benefits or expenses to an employee. For benefits provided in the 2025/26 tax year, the nature of these obligations depends on whether the benefit was payrolled or not and whether the employer opted to settle the tax arising on the benefit through a PAYE Settlement Agreement (PSA). The reporting is not limited to providing information to HMRC. The employer must also provide the employee with details of their taxable benefits for the tax year.

Regardless of whether taxable benefits are payrolled or reported through the P11D, the employer must also file a P11D(b) and pay Class 1A National Insurance.

Payrolled benefits

Payrolling is currently voluntary and employers can payroll taxable benefits with the exception of employment related loans and accommodation benefits as long as they have registered those benefits for payrolling before the start of the tax year.

Payrolling will become mandatory for all taxable benefits except employment related loans and living accommodation benefits from 6 April 2027. However, for 2027/28 onwards, employers will be able to register to payroll these benefits voluntarily.

Under payrolling, the taxable amount of the benefit is treated like extra pay and taxed through the payroll by including an amount in respect of the benefit or expenses in gross pay for PAYE purposes (but not for National Insurance as most taxable benefits are liable to Class 1A employer only contributions rather than Class 1 contributions). The amount treated as pay is found by dividing the cash equivalent of the benefit (or the amount taxable under the alternative valuation rules where the benefit is made available via an option remuneration arrangement) by the number of pay days in the tax year.

For example, where an employee is paid monthly, one twelth of the cash equivalent value is taxed each month. Thus, if the employee has a company car with a cash equivalent value of £4,800 and the benefit was payrolled, £400 would be added to the employee’s gross pay for tax (but not for National Insurance) purposes each month. The tax due for the pay period is calculated on the total pay for the month, including that in respect of the benefit, and deducted from the employee’s cash pay. The employee’s pay and deductions, including the payrolled benefits, are reported to HMRC through Real Time Information (RTI) on the Full Payment Submission.

As the benefits have been reported to HMRC in year they do not need to be reported after the year end and included on a P11D. However, the employer must provide the employee with details of their payrolled benefits for 2025/26 before 1 June 2026. This can be done on a payslip by letter or by email.

The payrolled amount is not included in gross pay for National Insurance purposes, as taxable benefits fall within Class 1A National Insurance purposes, payrolled benefits are dealt with in the same way as those reported to HMRC on form P11D and included in the calculation of the employer’s Class 1A National Insurance liability on form P11D(b), which must be filed online by 6 July 2026.

P11D reporting

Taxable benefits and expenses which have not been payrolled and which are not included within a PSA must be notified to HMRC on form P11D after the end of the tax year in which the benefits were provided. For 2026/26 benefits, the filing deadline is 6 July 2026.

The exact information that must be provided varies depending on the benefit. For some, all that is required is the cost to the employer of providing the benefit, any amount made good by the employee and the taxable amount. For other benefits, such as cars and employment- related loans, more information must be supplied. Employees must ‘make good’ by 6 July 2026.

The taxable amount will be the cash equivalent value unless the benefit was made available under an optional remuneration arrangement and the alternative valuation rules apply. Where this is the case, the benefit will be taxed by reference to the salary given up or cash alternative offered where this results in a higher taxable amount.

HMRC produce useful working sheets which can be used to calculate the cash equivalent values for some benefits. These can be found on the Gov.uk website.

The P11D’s must be filed online as HMRC do not accept paper forms. Employers with 500 or fewer returns to file can use either HMRC’s PAYE Online Service or commercial software. Employers who have more than 500 P11D’s to file will need to use commercia software to do so.

Where an employer has opted to payroll some benefits and also provided taxable benefits which were not payrolled, either through choice or because the benefits were employment related loans or living accommodation in respect of which payrolling is not currently available, the non-payrolled benefits should be reported to HMRC on the employee’s P11D. The payrolled benefits should not be included on the form.

Exempt benefits do not need to be notified to HMRC. However, an exemption will only apply where the associated conditions have been met. Likewise, benefits included within a PSA are not reported on the P11D.

Employers must provide employees with details of their taxable expenses and benefits returned on the P11D. They can either give the employee a copy of their P11D or notify them of the benefits, for example, by letter or email. For benefits provided in the 2025/26 tax year, this too must be done by 6 July 2026.

Benefits reported to HMRC must be included in the Class 1A National Insurance calculation on the P11D(b).

Class 1A National Insurance

Most taxable benefits are liable to Class 1A National Insurance. This is an employer only charge. The Class 1A rate is aligned with the Secondary Class 1 rate and is set at 15% for 2025/26.

The Class 1A charge for payrolled benefits and those reported on the P11D is calculated on the P11D(B), which is the statutory Class 1A return and also the employer’s declaration that all required P11D’s have been submitted.

Benefits included within a PSA are not taken into account in the Class 1 National Insurance calculation, Class 1B National Insurance contributions are payable instead.

Like the P11D, the P11D(b) for 2025/26 must be filed online by 6 July 2026, using either PAYE Online (for employers with 500 or fewer P11D’s only) or commercial software.

The Class 1A National Insurance must be paid by 22 July 2026 where payment is made electronically. If payment is made by cheque, it must reach HMRC by Friday 17 July 2026 as 19 July 2026 falls on a Sunday. Interest is charged at 4% above the Bank of England rate is the payment is made late.

Penalties may be charged where P11D or P11D(b) returns are late or incorrect.

PAYE Settlement Agreements

An employer can use a PSA if they wish to meet the tax due on a benefit on the employee’s behalf. Where this route is taken, the tax take is higher than if the employee paid the tax on the benefit as taxable by an employer on an employee’s behalf is itself a taxable benefit.

A PSA is not suitable for all benefits in kind and can only be used for items that are minor, that are provided irregularly or on which it is impracticable to operate PAYE. A PSA is typically used for benefits such as a staff party which falls outside the exemption for annual functions and events.

Once a PSA is set up it remains in place until it is cancelled by either HMRC or the employer. Consequently, where an employer already has a PSA in place, they will need to review it and assess whether it is still needed for 2025/26, and cancel it if it is not. This must be done no later than 5 July 2026. Any changes to an existing PSA must be by the same date. Where an employer needs to set up a new PSA for 2025/26, this too must be done by 5 July 2026.

The tax payable under a PSA is grossed up by reference to the marginal rates of tax payable by the employees who receive the benefit. The employer must also pay Class 1B on the taxable value of the benefits included in the PSA which would otherwise be liable for Class 1 or Class 1A National Insurance, and also on the tax due under the PSA. Like Class 1A, the Class 1B rate is aligned with the secondary Class 1 rate and set at 15% for 2025/26.

The tax and Class 1B National Insurance due on items included in a PSA does not need to be paid until 22 October 2026 where payment is made electronically, or by the earlier date of 19 October 2026 where payment is made by cheque.

Looking ahead

The 2026/27 tax year is the last year that payrolling is voluntary. From 6 April 2027 onwards it becomes mandatory for all benefits except employment related loans and living accommodation benefits, although employers will be able to opt to payroll these voluntarily.

There will be changes to the way in which Class 1A National Insurance on benefits in kind is reported and paid. Under payrolling, this will move in-year as for Class 1A National Insurance on taxable termination payments and sporting testimonials.

It is important that clients are made aware of these changes that they have systems in place to payroll benefits from 6 April 2027 onwards.