Understanding payroll reporting on employee benefits

From April 2026, all UK-based employers will be required to integrate any employee benefits, such as dental cover or company cars, into their main payroll operations.

Eliminating the need for separate reporting, employee benefits will be taxed through the payroll system directly.

This adjustment aims to simplify tax reporting for employers – although it introduces new criteria that employers must meet.

New obligations for employers

When these new rules are implemented, employers will no longer have the option to selectively report benefits through payroll separately – everything must go through payroll.

Additionally, employers will be required to:

• Maintain more detailed and accurate records.
• Assume greater responsibility for PAYE accuracy, which will face closer inspection.
• Clearly communicate to employees the tax process for their benefits to ensure transparency.
• Verify the compatibility of current payroll systems with these updates.
• Navigate the processing of specific benefits, such as company loans or vehicles, within this revised framework.

For employees, this could mean variations in net pay each month as the tax on ‘benefits in kind’ is deducted directly from their salary.

This may lead to fluctuating take-home pay, particularly in the initial year following implementation.

Preparing for the transition

Here are several steps employers can undertake to smoothly adapt to incorporating benefits in kind into payroll:

• Begin preparations early by evaluating existing payroll and benefits procedures to pinpoint necessary modifications.
• Confirm that your payroll software can accommodate benefits in kind and, if upgrades are necessary, schedule them promptly and test thoroughly to prevent any disruptions.
• Educate payroll and HR staff on the new processes, focusing on the alterations in tax computation and reporting.
• Inform your employees about the impact of these changes on their salaries and tax liabilities.
• Advise employees to reassess their personal budgeting strategies in light of possible shifts in their monthly income.

By proactively managing these changes, businesses can transition smoothly to the new requirements while ensuring compliance.

Proactive planning and open dialogue with employees are crucial for effectively navigating this shift.

For professional guidance or support concerning these upcoming changes, do not hesitate to contact our experts.