How Your Employee Benefits Will Be Taxed in 2026

Did you know that the way your extra job perks—like a company car, gym membership, or even special loans—are taxed is about to change dramatically? This change isn’t just a minor tweak; it’s a revolutionary update that will affect how taxes are collected from your paycheck.

What Are Taxable Benefits-In-Kind?

First off, let’s explain what “taxable benefits-in-kind” means. Sometimes, your employer gives you benefits that aren’t cash but still have a clear value. For example, if you receive a company car or if your employer pays for part of your accommodation, these are benefits with a monetary value. Even though you don’t see a cash deposit in your bank account, you still have to pay tax on these benefits because they add value to your overall earnings.

How Are These Benefits Handled Right Now?

Right now, employers have two main ways to deal with these benefits:

1. Payroll Them: With this method, the value of your benefit is added directly to your salary. Tax is then taken out of your paycheck every time you get paid. This means the extra tax on your benefit is deducted along with your regular earnings.
2. Report Them Later: Alternatively, employers can choose to report these benefits on a special form called a P11D after the end of the tax year. In this case, the tax on these benefits isn’t taken out immediately; instead, your tax code might be adjusted later on to collect the right amount of tax.

Because of these options, employers have been able to choose what works best for their company and you as an employee. But starting in April 2026, things are going to change dramatically.

What Is Payrolling? (Explained)

Imagine you receive a bonus along with your regular paycheck. Instead of waiting until the end of the year to figure out how much tax you owe on that bonus, your employer takes a little bit of tax out of every paycheck. This method is called payrolling.

• How It Works: When a benefit is payrolled, its value is treated just like extra wages. This means that each time you get paid, the tax for both your regular salary and the extra benefit is calculated together, and the appropriate tax is deducted immediately.
• National Insurance Contributions (NICs): Most benefits are also subject to something called Class 1A National Insurance Contributions (NICs). These are extra charges that employers pay, not you. However, for your monthly tax calculation, the benefit’s value is added to your earnings for tax (but not for NICs).

Payrolling makes tax collection simpler and more predictable because you pay the tax on your benefits in real-time, not in a big lump sum at the end of the year.

What Is Changing in April 2026?

Starting on 6 April 2026, the government is making a major change: payrolling will become mandatory for almost all taxable benefits. This means that employers will no longer have the choice to report benefits later on a P11D form (with just a couple of exceptions). From this date on, nearly every benefit’s value must be included in your monthly payroll, and the tax will be deducted immediately.

What’s Included and What’s Not?

• Included Benefits: Almost every taxable benefit will have to be paid through the payroll system. This change is designed to ensure that tax is collected consistently and in real-time.
• Exceptions (For Now): There are two exceptions:
  • Cheap Employment-Related Loans: These are low-cost loans given to employees.
  • Living Accommodation: Benefits related to housing provided by your employer.
• Employers can still choose to include these exceptions in the payroll if they want. However, even these may be brought into the mandatory system later on.

How Do Employers Get Ready for This Change?

If you work in a company, especially in the finance or payroll department, here’s what you need to know:

• Registration is Key: To use payrolling, employers need to register the benefits online before the start of a tax year. For instance, if an employer wants to start payrolling benefits in the 2025/26 tax year, they must register those benefits by 5 April 2025. Once a benefit is registered for payrolling, it stays that way until the employer cancels it—again, cancellation must be made before the new tax year begins.
• Accurate Calculations Matter: The taxable amount of a benefit is usually its cash equivalent. In some cases, if the benefit is part of an optional arrangement, the taxable amount might be based on the salary you give up or the cash alternative offered—whichever is higher. This amount is then added to your regular salary for that pay period.
• The 50% Rule: There’s an important rule to keep in mind: an employer cannot deduct more than 50% of an employee’s cash pay as tax. This rule ensures that you have enough money left over to cover your living expenses. If a benefit’s tax would cause deductions of more than 50% of your cash pay, employers have two choices:
  1. Stop Payrolling That Benefit: The benefit will then be reported on the P11D at the end of the tax year.
  2. Carry Forward the Untaxed Amount: The untaxed portion can be postponed and deducted in later pay periods when your salary might be higher.
• Real-Time Reporting: With the change in 2026, the system will require more detailed, real-time reporting. This means that every month, the tax on your payrolled benefits is reported to HMRC along with your other earnings and deductions. Currently, even employers who use payrolling must also submit a form called P11D(b) for NICs purposes, but this process will change as the new rules take effect.

What Does This Mean for You as an Employee?

For most employees, this new system means that the tax on benefits will be collected gradually throughout the year rather than in one big adjustment at the end of the year. Here’s how it affects you:

• Consistent Deductions: Your paycheck will reflect the tax on both your salary and any benefits immediately so that you won’t get a surprise bill later on. It’s like paying as you go.
• Clearer Information: Employers are required to inform you about your payrolled benefits by 1 June after the tax year ends. You might receive this information on your payslip, via email, or in a letter. This transparency helps you understand exactly how much tax is being taken from your earnings.
• No More Big Year-End Adjustments: Since the tax is deducted in real-time, there won’t be a large, unexpected adjustment in your tax code at the end of the year. This makes managing your finances much simpler and less stressful.

The Big Picture: Why Is This Change Being Made?

This update is part of a broader effort to modernize the tax system. By collecting tax on benefits in real-time, the government aims to:

• Simplify Tax Collection: Taking tax out of your paycheck right away avoids the need for complex year-end calculations.
• Improve Record Keeping: More detailed and real-time data will help HMRC make sure everyone is paying the right amount of tax.
• Ensure Fairness: A more consistent system can help prevent errors and ensure that all taxable benefits are treated equally.

While some worry that the new system could increase employers’ administrative workload, the overall goal is to create a smoother, fairer process for everyone.

Key Points to Remember

1. Before 2026: Employers can choose to either add the value of benefits to the payroll or report them on a P11D form at the end of the tax year.
2. From 6 April 2026: Almost all taxable benefits will have to be processed through the payroll, meaning tax is taken out as you get paid.
3. Exceptions: For now, cheap employment-related loans and living accommodations are the only benefits not immediately required to be paid, though employers can opt in if they wish.
4. Registration Deadline: Employers need to register benefits for payrolling online before the start of each tax year. For example, if payrolling is to start in 2025/26, registration must be completed by 5 April 2025.
5. 50% Rule: Employers cannot deduct more than 50% of your cash pay as tax to ensure you have enough money for living expenses.

The change to mandatory payrolling from 6 April 2026 is a major update that will affect how taxable benefits are handled in the UK. For employees, this means a more straightforward, predictable system where tax is deducted from each paycheck rather than adjusted at the end of the year. For employers, it means a shift towards real-time reporting and more detailed data submissions to HMRC.

This ultimate guide has walked you through taxable benefits-in-kind, how payrolling works today, and what changes to expect in 2026. While it might seem like a lot to take in, understanding these changes now can help you prepare for the future—whether you’re managing a business or simply curious about how your paycheck is calculated.

Stay curious, keep informed, and remember: this revolutionary shift is designed to make tax easier for everyone. It’s not just about following new rules—it’s about making sure that taxes are fair, transparent, and collected in a way that works best for you!