The Autumn Budget | Changes for employers and scheme sponsors

Summary

The Autumn Budget on 28th October made only minor changes to pensions. For employers, the main points are two changes to the tax treatment of pension death benefits and a change to the definition of terminal illness for early access to pension savings. These three measures are due to be legislated in Finance Bill 2026-27, so they are announced and not yet law. No changes to the tax-free lump sum allowance were announced.

Outside pensions, the Budget confirmed that mandatory payrolling of benefits in kind starts on 6 April 2027, and that employer-provided medical benefits, including private medical insurance, are in the first phase. Some employers already payroll benefits voluntarily, but from April 2027 it will no longer be optional for the benefits in scope.

Death benefits: the two-year deadline is being removed

Current position

Where a member dies before age 75, a lump sum death benefit (or a beneficiary annuity paid from drawdown funds) is generally paid free of income tax, provided it falls within the member’s available lump sum and death benefit allowance. At present, that treatment is lost if the scheme administrator pays the benefit more than two years after it knew, or could reasonably have known, of the death. The rule applies even where the delay is outside the beneficiary’s control.

What is changing

For members who died before age 75, a payment will no longer become taxable simply because more than two years have passed. This applies whether the payment goes to an individual or to a trust or the member’s estate.

Timing

The change applies to payments made on or after 28 October 2026, including payments relating to deaths before that date. Payments already made are not reopened. Where tax was correctly charged under the old rules, there is no automatic repayment.

What does not change

• The member must still have died before age 75.
• Tax-free treatment still depends on enough lump sum and death benefit allowance being available.
• Trustees and scheme administrators remain responsible for identifying beneficiaries and settling benefits promptly.

Why it matters to employers

Bereaved families often turn first to the employer. The removal of the deadline reduces the tax risk where a benefit is delayed, for instance while beneficiaries are being identified. It does not change expectations on prompt payment.

Death benefits above the member’s allowance

Current position

A lump sum death benefit is often paid before anyone knows whether the member’s lump sum and death benefit allowance has been exceeded, because the personal representatives must first gather information from all of the member’s schemes and report to HMRC. Where the allowance has been exceeded, the excess is currently taxed as the recipient’s pension income. That can mean reopening the recipient’s wider tax and income-related benefits position for the year of payment, potentially several years later.

What is changing

The excess will no longer be treated as pension income. HMRC will instead calculate and collect a separate tax charge at the recipient’s marginal rate of income tax. The government expects this to affect a small number of beneficiaries.

Timing

The change has retrospective effect for relevant lump sum death benefits paid on or after 6 April 2024, with transitional provisions for 2023/24. Related changes dealing with the interaction with inheritance tax take effect from 6 April 2027. The measure also corrects a technical issue in how certain disregards operate when calculating the available allowance for people holding fixed, individual or primary protection.

Terminal illness definition

The Budget documents confirmed changes to the definition of terminal illness, intended to make it easier for terminally ill individuals to access their pension savings. The changes will also allow overseas registered medical practitioners to provide the medical evidence. This is due to be legislated in Finance Bill 2026-27. We have not yet seen the detailed wording, so we would expect scheme administrators to confirm how and when they will apply the new definition.

Mandatory payrolling of benefits in kind, including medical benefits

Current position

Employers generally report taxable benefits in kind to HMRC after the end of the tax year on form P11D, with the tax usually collected through adjustments to employees’ PAYE tax codes. Since April 2016, employers have been able to choose to payroll benefits voluntarily, so that Income Tax is deducted through PAYE in the year the benefit is provided. HMRC says take-up of voluntary payrolling has been limited and many employers continue to use the P11D process.

What is changing

From 6 April 2027, employers providing the following benefits will be required to report them through payroll software and deduct tax in real time, alongside their other PAYE obligations:

•  Employer-provided medical benefits

Most other benefits in kind will follow from 6 April 2028. Employment-related loans and employer-provided living accommodation are not mandated. They can be payrolled voluntarily, and existing year-end reporting continues to apply to them. HMRC has also said that benefits provided to globally mobile employees remain outside mandation for now.

Why it matters

The mandation means the benefit is reported in real time, so that employees pay the right tax at the right time. For employers it removes the need to complete a P11D for the benefits that are payrolled. It does not, on what HMRC has published, change which benefits are taxable or the amount of tax due. It changes when and how the tax is reported and collected.

Employers who already payroll voluntarily

Employers already payrolling benefits voluntarily are not affected in the same way, but from April 2027 payrolling medical benefits and company cars and vans becomes a requirement and no longer a choice. Employers who still use P11D for these benefits will need to move them to payroll.

Timing and delay

The measure was originally planned to start earlier. After feedback from employers and software developers, the government introduced a phased approach. The registration service for voluntary payrolling re-opens on 5 November 2026. The government confirmed in July 2026 that voluntary payrolling will also be available for benefits not yet mandated, such as loans and accommodation, and is considering extending it to Class 1A National Insurance contributions. Final HMRC guidance for the first phase is expected from Autumn 2026, and the guidance and draft legislation may still change before then.

What this may mean in practice

• Medical benefit data will need to flow from the insurer or benefits provider to payroll in time for each pay run, rather than being collated after year end.
• Where an insurer’s invoices or premiums arrive late or change mid-year, employers will need a process for apportioning the benefit through the year.
• HR, reward, benefits providers and payroll teams will need to agree who supplies which data and when.

Points you may wish to consider

• Payrolling readiness. Whether your payroll software and process can report medical benefits, from 6 April 2027, and whether benefits currently reported on P11D need to move to payroll.
• Benefits provider data. How your private medical insurance provider will supply the data payroll needs, and how mid-year changes in cover or premiums will be handled.
• Voluntary payrolling. Whether to register to payroll other benefits voluntarily ahead of the wider mandation from April 2028. The registration service re-opens on 5 November 2026.
• Communications. Whether any bereavement or death-in-service guidance given to employees’ families refers to the two-year rule, and so needs updating once the legislation is enacted. You may also want to tell employees that their tax on medical benefits will be collected through payroll.

As ever if you have any questions in relations to the latest announcements, please do not hesitate to get in touch with your Connor Broadley contact. Alternatively, please email teambc@connorbroadley.co.uk