Payrolling benefits in kind

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 for the calculation of benefits in each pay period
• Ensure that you have modelled the financial impact of paying Class 1A NIC for both tax years 2026/27 and 2027/28 in the same tax year (employers) and for employees whose codes will be adjusted to collect tax on benefits in real time as well as underpayments for previous years where Forms P11D were prepared.

Communicate the impact of the changes to your employees. 

• 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 2026 on a voluntary basis. This will provide an opportunity to “test” the system while P11Ds are still available as a backup.   

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. The only exception is where the employer has chosen to voluntarily payroll benefits in advance of the introduction of mandatory payrolling.  

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 by their employer and pay 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 the tax year 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. 

Mandatory payrolling of benefits in kind (BiK) for income tax and Class 1A NIC purposes will now go ahead from April 2027.  

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 in real time. 

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 remain voluntary from April 2027 and must be agreed with HMRC by 5 April 2027, with a timetable to mandatory payrolling of these benefits being published “in due course”. With the official rate of interest changing on a quarterly basis since 6 April 2025 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, expected in Autumn 2025 when draft guidance is to be published for consultation. In some instances P11Ds may be retained but this should become clearer in Autumn 2025 when further guidance and draft legislation is due. 

Initial specifications for software developers will be available in December 2025 with the final specifications to be published in the second half of 2026. This does not leave much time (perhaps as little as four months) for software packages to be updated and tested in their final forms, rolled out to employers and for those employers to have systems in place to collect the necessary data in the format needed for payroll in real time. 

HMRC have stated they will remove all BiK from employee tax codes, excluding underpayments, prior to April 2027 so that they are taxed correctly when BiKs are reported in real-time. However underpayments from previous tax years will still be included in the tax code. 

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

There will still be a light touch approach in the first year (unless errors are deliberate) but from 2028/29 onwards the interest and penalty regime will be similar to that currently in place for voluntary PBIK – details will be provided later in 2025. 

Although the start date has been delayed by a year to April 2027, there are many areas where the impact of the change will need to be managed carefully in advance; including communication to employees, payroll processes and other administrative changes. 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 an ‘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 that produce small under- or over-deductions of tax, so avoiding this is key. 

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 reporting requirement each pay period? 

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?   

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 pay period 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 2027 if you aren’t operating a modified payroll process? 

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. HMRC have said they will adopt a “soft touch” for the first year of mandatory payrolling of benefits, but employers should not expect that to continue. 

If you need any support or have any questions, speak to an expert