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As part of measures to simplify and modernize the UK tax system, HMRC has announced payrolling Benefits In Kind (BIK), meaning that the tax and NIC on benefits will be collected real time through payroll rather than reported annually on P11D forms.
Benefits in Kind (BIK) are non-cash benefits provided to employees, such as company cars, private medical insurance, fuel benefits, and employer-paid personal expenses. Most BIKs are taxable and subject to Income Tax and Class-1A National Insurance Contributions (NICs).
When employers offer benefits in kind to employees, they are usually required to report these on form P11D at the end of the tax year. With payrolling benefits in kind, these benefits are instead taxed through the payroll system, just like regular salary payments so that the employees pay the correct amount of tax on them throughout the year. When an employer decides to payroll benefits, HMRC must be formally notified to avoid incorrect tax deductions and double taxation.
Key highlights
- Payrolling Benefits In Kind (BIK) will become mandatory from April 2027. HMRC has indicated that employers may voluntarily start payrolling BIK from April 2026, enabling businesses to test and refine their internal processes before the mandatory implementation. Guidance aligned with HMRC's transition timeline similarly reflects the availability of early voluntary adoption.
- Employers must register with HMRC before 5 April so that payrolling benefits can be started from 6 April to avoid incorrect tax deductions and double taxation. Mid-year registration is NOT allowed. If registration is missed or any benefits which are not payrolled, they must continue to be reported on P11D for that tax year.
- Employer registration can be done by the employer or through a payroll agent or an accountant or tax agent with PAYE authorization.
- During registration the employer confirms the benefits which will be payrolled and whether any employees are excluded. This will allow HMRC to remove payrolled benefits from employee tax codes, and, ensure income tax is collected only via payroll.
- The taxable value of BIKs will be reported via the full payment submission (FPS), allowing tax and NICs to be reported to HMRC in real time.
- As of now following benefits cannot be payrolled and must be
reported on form P11D
- Employer-provided accommodation
- Interest-free or low-interest loans
Way forward
- Employee communication - Employers must inform employees in writing that benefits are being payrolled. This can be done via payslip notes, email, or letter.
- No P11D required - Once payrolling of benefits is started, the employer is not required to complete form P11D for those benefits as the tax will already been deducted via payroll
- Payroll set-up - The employer will require payroll software support for payrolling benefits and will need to check with the payroll software provider on any additional upgrades, testing and costs.
Our Comments
In summary, payrolling benefits in kind is a straightforward way for both employers and employees to ensure that benefits are taxed accurately and efficiently. While it is currently optional, the mandatory switch in 2027 will make it even more important for employers to familiarize themselves with the system now. This change offers employers the opportunity to simplify their processes and reduce long-term administrative work.
So, start now by reviewing the benefits, completing BIK registration, aligning with the payroll software provider, and communicating with the employees.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
