Payrolling benefits in kind

From April 2026, all employers will be required to payroll benefits in kind (BIKs), rather than doing it voluntarily as they do now. 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 every year.

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 2024/25, 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. 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 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.

When does mandatory payrolling of benefits in kind begin?  

Mandatory payrolling of benefits in kind for income tax and Class 1A NIC purposes will go ahead from April 2026 as proposed by the previous government. 

The reporting process for BiKs will be through the Full Payment Submission (FPS), the same process as currently used to report salary etc. to HMRC.  

Businesses will need to report more data than is currently required to provide a breakdown of the BiKs being reported through payroll, and to reflect the introduction of 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. 

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. If you pay at irregular intervals (ie 4-weekly), the position can become very challenging.

What should employers be doing now? 

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 be 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. 

Practical issues for employers

1. 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?

2. 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?

3. 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?

4. Internationally mobile employees 

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

5. Payroll process 

Decide 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.

Key takeaways for employers

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. 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 employees. They will need to be able to plan for the impact on net pay.  
• 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.   

BDO’s employment tax specialists are here to help with all aspects of the transition and beyond.

Contact us