Changes in payroll reporting are on the horizon and businesses need to prepare, says MARK PRYCE
Thousands of Scottish businesses are probably unaware of the implications of new real-time payroll reporting rules that are set to come into force in less than 15 months, in particular the extra cash flow pressures and administrative costs that will arise.
Now is the time to begin preparing for the changes, effective from 6 April 2026, that will require notification to HMRC of Income Tax and Class 1A National Insurance Contributions for most benefits in kind.
The change will also mean that hundreds of thousands of Scots will no longer have their income tax collected in arrears but will be obliged to pay their tax in real time. End of year tax returns will quickly be phased out.
From 6 April this year businesses will begin paying 15% NIC on benefits-in-kind, such as company cars, health insurance and gym memberships. From April next year they will also have to report any benefits in real-time whilst also paying the higher 15% NIC rate.
The new real-time rules and higher NIC rates will add significant administrative pressures and costs to businesses already reeling from the tax increases in the last Budget.
Businesses will have an option to implement voluntary payrolling in the next tax year – 2025/26 – to iron out any teething problems before the new real-time regime goes live.
Given the potential for reporting mistakes, we would encourage employers to introduce voluntary payrolling from the tax year 2025/26 to iron out any teething problems and ensure that their systems and processes are ready for the switch.
The changes are part of a move towards digital reporting in real-time and the collection of tax in real-time, usually monthly, rather than once a year.
The key question for employers is whether their payroll software will be capable of dealing with real-time reporting. They will need to know in advance about expenses and benefits-in-kind going through the books, whereas in the current reporting system they can look back over 12 months to see what the costs were.
Beneficial loans, including overdrawn directors’ loans accounts and living accommodation provided to employees, cannot be voluntarily reported on the payroll and will remain reportable on a P11D form at the end of the tax year.
Announcements in the Autumn Budget confirmed that the mandatory payrolling of beneficial loans and living accommodation will be delayed beyond April 2026 but it will be possible to report these benefits on a voluntary basis from April 2026.
All other benefits will be subject to mandatory payrolling.
Businesses are facing rising accounting and processing costs in addition to rising taxes. We would encourage businesses to reduce these costs by planning ahead for the new regime and taking advantage of the voluntary payroll reporting ‘window’ between 2025 – 2026.
Example
If a benefit-in-kind with a monthly value of £120 is included in the payroll, this will result in a basic rate taxpayer employee paying tax on the benefit of £24 and the employer paying £18 in Class 1A NICs in real time (based on the increased rate of employer NICs of 15%).
Mark Pryce is head of business tax with Azets in Scotland
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