Payrolling benefits in kind

From April 2026, all employers will be required to payroll benefits in kind. So what will this mean for your business? 

The good news is that you will only be required to prepare P11Ds for employees every year if you provide employment related loans or accommodation. 

However, moving over to payrolling benefits will mean that your business will need to report more data than before, which could mean more room for error. 

Current position – P11D and P11D(b) 

Currently, 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.

Businesses calculate the amount to report, complete the forms and submit them to HMRC using proprietary software – only the smallest employers can use HMRC’s software.

Employees are issued with a P11D and pays the income tax due on their benefits, 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, although you may have payrolled every benefit given to your employees during 2024/25, you will still have a Class 1A NIC liability and will still need to submit a P11D(b) and pay the NIC due. Employers 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 to payroll most BIKs so that the benefit is reported and 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.

When does mandatory payrolling of benefits in kind begin?  

Mandatory payrolling of benefits in kind (BiK) for income tax and Class 1A NIC purposes will go ahead from April 2026.  

The reporting process for benefits in kind will be through the Full Payment Submission (FPS), the same process as currently used to report salaries to HMRC. 

Businesses will need to report even more data than is currently required, to provide a full breakdown of the benefits being reported through payroll, and to reflect Class 1A NIC being payrolled.  

Payrolling employment-related loans and accommodation will be voluntary for 2026/27, with a timetable to mandatory payrolling of these benefits being published “in due course”. Until then, forms P11D and P11D(b) can be used to report loans and accommodation, but cannot be used for any other benefit in kind. With the official rate of interest no longer fixed for a tax year - it may change on a quarterly basis from 6 April 2025 onwards - employers may find it easier to continue to use P11Ds for loan benefits while this is permitted. 

An “end of year process” will be used if the value of BiKs isn’t known during the year, for example, if the benefits were provided by 3rd party suppliers. We await details of this and rules for special categories like globally mobile employees.   

Specifications for software developers will not be available until mid/late 2025, leaving little time for employers to get processes for extra data collection and payroll solutions in place before needing to go live, but HMRC will expect high levels of accuracy from day one.  

Importantly, benefits in kind will need to be payrolled in real time monthly, or weekly if you have weekly paid employees. If you pay at irregular intervals (ie 4-weekly), the position can become very challenging. 

Unsure of your business’ position? Speak to an expert now.

What should employers be doing now? 

There are many areas where the impact of the change will need to be managed carefully -communication to employees, payroll processes and other administrative changes. It is very important not to over-simplify, so now is the time to review your processes and data to make sure you can report the correct benefit value each month. It may also be worth setting up flags to ensure that any changes are recognised in sufficient time to amend the amount payrolled. 

You should also consider expert support for a end of year check to make sure that you have payrolled the correct value by the end of the year. In practice, we often see errors as a result of practical issues, and errors in reporting can produce small under- or over-deductions of tax, so avoiding this is key.  

Practical issues for employers

1. Payroll process 

Decide who within your 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 the necessary information?   
 

Do your current payroll reporting systems need to be reviewed in line with the new expectations? Or will you need to implement a new process to cover this additional monthly? 

2. Joiners and leavers 

Employers will need to review monthly employee movement to ensure payroll reporting is correct for real time payroll reporting. How will you communicate this to your employees, and will it 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? 

3. Benefits data 

If you provide company cars, there are complex rules to consider depending on fuel type, personal mileage reimbursement, or changes in cars – your payroll team will need substantial information in order to report accurately.   

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

4. Variable pay periods 

Do your current payroll process and records make it easy to calculate payments for employees with variable pay periods to feed into payroll in time to include correct benefit in kind amounts? 

5. Internationally mobile employees 

How will you report BIKs for your internationally mobile employees from April 2026 if you aren’t operating a modified payroll process? 

Increased risk of penalties 

The increased number of calculations and the quantum of tax being collected through the payroll increases the chances of errors. To make sure you are aware of any potential risks, you should test your systems thoroughly. There may be a “soft touch” for the first year of mandatory payrolling of benefits, but employers should not expect that to continue beyond one year. 

Key takeaways for employers

These changes represent a significant shift for all employers. Do not underestimate how complex they are, how many parts of your organisation they might affect and just how long they will take to bed in. You should:   

• Ensure that your data collection and payroll systems are ready for payrolling benefits   
• Ensure that you have systems in place or support for the calculation of benefits in each pay period 
• Communicate the impact of the changes to your employee - they will need to be able to plan for the impact on net pay 
• Do not 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.    

Our employment tax specialists are here to help with all aspects of the transition and beyond – if you have any questions on how to prepare, please get in touch. 

SPEAK TO AN EXPERT