Payrolling benefits in kind

HMRC issued guidance in January 2024 that, from April 2026, there will be a requirement for all employers to payroll benefits in kind (BIKs) on a mandatory basis rather than voluntarily as is currently the practice. The first reaction was that at least they had given a two-year period for employers to deal with the change, unlike the ‘last minute’ announcement that from April 2023 paper P11Ds would be abolished and a software solution would be required. The change is badged as simplification and the good news is that it will mean that there will be no requirement to prepare P11Ds for employees annually as is currently the case. 

Current position – P11D and P11D(b) 

As a quick reminder, the current position is that (unless an employer is already payrolling their benefits) the taxable value of benefits and expenses provided to employees must be reported via forms P11D and P11D(b) by 6 July following the end of the relevant tax year.  

This involves calculating the amount to report, completing the forms and submitting them to HMRC using proprietary software (apart from the smallest employers who can use HMRC’s software).  

The employee is issued with a P11D and pays the income tax due on their benefits received either through self-assessment or via an adjustment to their PAYE tax code.  

Form P11D(b) is a dual-purpose return. It is a declaration that all the P11Ds are correct and complete, and a return of the Class 1A NIC payable. Therefore, whilst you may have payrolled every single benefit given to employees during 2023/24, you will still have a Class 1A NIC liability and will still need to prepare and submit a P11D(b) to HMRC and pay the NIC due. The employer must pay the relevant Class 1A National Insurance by 19 July following the end of the tax year, or 22 July for online payments.  

Currently employers can apply for HMRC’s agreement to payroll most BIKs so that the benefit is reported and subsequently taxed under RTI (Real Time Information). This does not apply to accommodation benefit or loans with interest charged at less than the official rate which must be reported on the P11D. 

What is changing? 

The not so good news is that BIKs will need to be payrolled in real time monthly, or weekly if you have weekly paid employees, and if you pay at an irregular interval the position can become very challenging. Interestingly, HMRC have not stated that P11Ds are to be abolished and, therefore, the reporting position for beneficial loans and accommodation may not change. There has been no announcement on this as yet, so watch this space. It is also currently unknown if the due date for paying Class 1A NIC will change once it is payable by payroll software. 

What should an employer be doing now? 

While it is useful to have a two-year period for employers to plan for the transition to payrolling BIKs, there are many areas where the impact of the change in terms of communication to employees, payroll processes and other administrative changes will need to be managed carefully. For example, employees could have two years’ worth of benefits on which tax must be collected in one tax year. While it represents a timing difference rather than an additional cost, this could represent a significant amount for some employees. Considering the level of benefits currently reported via P11Ds, it appears that this could be a widespread problem for employees in 2026/27 tax year. This is particularly the case where employees may be lower paid in cash terms but have a reasonable level of benefits and expenses. At this time, and without knowing the finer details from HMRC on how this change will work in practice for payroll reporting, we have set out below our initial thoughts on some of the issues that may arise: 

Joiners and leavers 

Employers will need to review monthly employee movement to ensure payroll reporting is correct for real time payroll reporting. How will they communicate this to employees, and will this be more complicated for the payroll team? 

What will the impact of the mandatory payrolling be on Tax Codes? Will HMRC be able to update their systems to ensure the tax code of everyone who has a BIK restriction is updated correctly for tax year 2026/27? 

Benefits data 

Where company cars are provided, there are complex rules to consider depending on fuel type, personal mileage reimbursement, or changes in cars as there will be substantial information to be provided to the payroll team. 

Relocation costs, who will be responsible for considering what element would be ‘qualifying’ and whether the tax exemption can be applied? 

If the employer has a benefits provider, how quickly can the required monthly changes be sent through to the payroll team to ensure payroll reporting deadlines are not missed? 

Variable pay periods 

Do the current payroll process and records make it easy to calculate payments for these employees to feed this into payroll in time to include correct benefit in kind amounts? 

Internationally mobile employees 

How will BIKs be reported from April 2026 for these individuals if a modified payroll is not being operated? 

Payroll process 

Who within the payroll or finance teams will be responsible for sourcing and collating benefits data, and checking taxable values are correct monthly? 

What will this process look like and will be it be robust enough to capture all information? 

Do the current payroll reporting systems need to be reviewed in line with the expectation this additional monthly reporting may require a new process to be implemented? 

Increased risk of penalties 

The increased number of calculations and the quantum of tax being collected through the payroll increases the chances of errors. It is important for employers to test their systems thoroughly and be aware of the potential risks. 

Four key takeaways for employers

  1. Ensure that your data collection and payroll systems are ready for payrolling benefits. 
  2. Ensure that you have systems in place or support for the calculation of benefits in each pay period. 
  3. Communicate the impact of the changes to your employees. They will need to be able to plan for the impact on net pay. 
  4. Don’t leave it to the last minute – you will need time to assess your readiness and get the systems in place for payrolling. Consider payrolling some or all of your benefits from April 2025 on a voluntary basis to give yourself time to “test” the system while P11Ds are still available as a backup.  

In short, these changes represent a significant change for all employers. Do not underestimate just how complex they are, how many parts of the organisation they might affect and just how long they will take to bed in. BDO’s employment tax specialists are here to help with all aspects of the transition and beyond. 

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