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Big changes are on the way for how employers handle staff perks in the UK. If you offer things like company cars, private health cover, or other extras, the way they’re taxed won’t stay the same for long.
The government is updating the system to make things easier and more straightforward, but it also means businesses and software providers need to be ready. Before diving into the details, let’s take a step back.
What exactly are benefits in kind, how do they work, and what does payrolling have to do with them? Read our detailed blog to learn all about it.
What Are Benefits in Kind?
Benefits in kind (BiKs) are non-cash perks an employer provides to employees, such as company cars, private medical insurance, or gym memberships.
If taxable, their cash equivalent must be reported. Payrolling benefits in kind means including the taxable value of these benefits in an employee’s pay each pay period, so Income Tax and, for most eligible benefits, Class 1A National Insurance contributions are collected in real time via payroll/RTI instead of at year-end via a P11D.
Some items, like living accommodation or low-interest loans, cannot currently be payrolled and still need to be reported on a P11D.
How Does Payrolling BiKs Work In Practice?
Payrolling benefits in kind starts by working out the cash value of the benefit. This amount is added to the employee’s taxable pay, and tax is taken in real time through PAYE (Pay As You Earn). Each pay period, the details are sent to HMRC in the Full Payment Submission (FPS).
How Are Benefits in Kind Taxed?
When it comes to benefits in kind, tax authorities like HMRC in the UK treat them just like a form of income, including the payment of tax on benefits. That means they’re usually subject to tax, just like your salary, which is calculated based on the number of pay periods in the year.
How Are Benefits in Kind Valued?
Each benefit gets a monetary value attached to it. This amount is then added to an employee’s regular pay to calculate tax. For e.g.;
- Company cars: Value is often based on the car’s list price and CO₂ emissions.
- Other perks: Usually taxed according to what it costs the employer to provide them.
How Is the Tax Collected?
Employers can handle this in two ways:
- Through Payrolling Benefits In Kind: The taxable value is added to each paycheck, including the taxable amount, and the extra tax and National Insurance are deducted in real-time.
- Through Annual Reporting (P11D): Employers report benefits at year-end, and the tax office updates the employee’s tax code to collect what’s owed.
How Can Employers Prepare for Payrolling Changes?
To stay ahead of the new payrolling requirements, employers should take proactive steps to ensure accurate reporting and a smooth transition:
- Update Payroll Systems: Ensure software is ready to report benefits in kind in real time.
- Review Employee Data: Check tax codes and benefit records for accuracy.
- Train Staff: Educate payroll teams on new reporting requirements.
- Stay Informed: Follow HMRC guidance and deadlines to avoid penalties.
- Plan Ahead: Test processes before the April 2027 rollout to ensure smooth implementation.
What Are The Main Advantages of Payrolling Benefits In Kind?
Payrolling Benefits In Kind (BiKs) has a great many advantages for both employers and employees alike.
For Employers
For employers, the gains are clear:
- Simple Processes: No need for year-end P11D forms.
- Fewer Mistakes: Taxable benefits are captured directly in payroll.
- Easier Compliance: Payroll software manages calculations in real time.
- More Focus On Priorities: Finance teams spend less time fixing errors and more on running the business.
For Employees
Employees also see the benefits, including details of the benefits:
- Predictable Deductions: Tax and National Insurance are spread across the year, avoiding sudden bills.
- Transparency: Perks like cars or gym memberships are reported upfront, building trust in the process.
- Better Budgeting: A Clearer view of taxable pay makes planning living costs easier.
What Are The Current HMRC Rules for Reporting Benefits in Kind (BiKs)?
Employers report taxable benefits annually to HMRC via the P11D and P11D(b) forms.
- Voluntary Payrolling (since 2016): Since 2016, most benefits can be taxed through payroll if employers register with HMRC before the tax year. Employers must also tell staff in writing which benefits are payrolled and how payslips will show them.
- Class 1A National Insurance (NICs): Even with payrolling, employers must still pay Class 1A NICs on benefits. These are based on the same cash values and reported annually on the P11D(b), due by 6 July after the tax year.
Learn how to master P11D and P11D(b) forms and make the most of your employee benefits by reading this guide.
What Changes Will Mandatory Payrolling Of Benefits In Kind Bring from April 2027?
Get ready for a major shift in employee benefits taxation. HMRC has confirmed the payrolling of benefits in kind to become mandatory from April 2027, replacing the voluntary system. Here are all the changes you need to know:
1. Payrolling Benefits: Mandatory Reporting
Currently, P11Ds collect tax on benefits later, often causing underpayments and tax code issues, including any additional tax due.
Mandatory payrolling will instead collect tax alongside salaries, highlighting the difference between payrolling benefits in kind vs P11D.
2. Key Dates and Deadlines
Here are some important dates and deadlines to remember:
- Before April 5, 2026: Last chance to register for voluntary payrolling on a voluntary basis.
- April 2027: Payrolling of benefits in kind to become mandatory for most taxable benefits.
- July 6 (annually): P11D(b) deadline for Class 1A NICs remains.
3. Benefits Excluded Initially
Some complex benefits will be excluded at first, including:
- Employer-provided accommodation.
- Low- or no-interest (beneficial) loans.
These must still be reported on P11Ds until HMRC phases them into the new system.
What Employer Obligations Come with the New Payrolling Regime?
There are a few employer obligations that would be made mandatory from April 2027. Let’s see what they are.
1. The Payrolling of Benefits: New Employer Obligations
From 6 April 2027, most taxable Benefits in Kind must be payrolled.
- Updating payroll systems to support new FPS fields for benefits, or confirming outsourced providers are ready before the tax year begins.
- Keeping clear, auditable records of benefit valuations and how they are applied in payroll.
- Reporting and taxing benefits in real time alongside salaries in each payroll run, rather than waiting until year-end.
- Employers must register with HMRC to voluntarily payroll company benefits
2. Class 1A NICs: Annual vs Real-Time Reporting
Here’s one of the biggest shifts: Class 1A NICs will also move into payroll reporting.
That means instead of one annual lump-sum payment in July, employers may see liabilities arise throughout the year with each pay run, especially by the end of the year. This could create cash flow impacts compared to today’s system, so planning ahead is important.
Here is a comparison of the annual vs real-time processes for Class 1A NICs:
| Feature | Current Annual System | New Real-Time System (from 2027) |
|---|---|---|
| Reporting | Annually on form P11D(b) after the tax year. | In real-time on the Full Payment Submission (FPS) with each pay run. |
| Payment | A single lump sum payment, contributing to the total taxable pay, is due by July 22nd. | Any additional NICs due will be payable by July 22nd after year-end reconciliation. |
| Cash Flow Impact | Predictable, one-off annual payment. | Liability is visible monthly, which may require more frequent cash flow planning. |
Mandatory Payrolling of Benefits in Kind Guidance
HMRC has published guidance to help employers prepare for reporting benefits in kind through payroll software. The mandatory rollout, initially planned for April 2026, has been postponed to April 2027 to give businesses and software providers extra time to comply.
What Are the Compliance Rules and Common Mistakes in Payrolling Benefits in Kind?
To stay compliant, businesses must ensure accurate reporting and keep payroll systems updated. Here are the areas where errors often occur:
- Frequent Reporting Errors
These are some common errors:
- Miscalculating the cash equivalent of benefits like company cars or gym memberships.
- Forgetting to update employee tax codes in the first year of mandatory payrolling.
- Misreporting benefit values, leading to payroll discrepancies and unexpected tax bills.
- Penalties for Non-Compliance
If you’re found to be non-compliant following would be the consequences:
- Employers may face fines or additional National Insurance charges.
- Employees could see sudden increases in taxable income (e.g., based on company car fuel type).
- Both employers and employees risk cash flow disruption if reporting is inaccurate.
Read here to avoid payroll errors: UK laws, risks & correction steps.
Why Should Businesses Rely on Direct Payroll Services for Payrolling Benefits in Kind?
Direct Payroll Services offers expert payroll support across London and nearby areas, helping businesses of all sizes manage payrolling efficiently. From small companies to accountants and care homes, we ensure accurate tax deductions while minimising administrative burden.
Our team provides customised solutions, including in-house CIS payroll for contractor payments, tailored to your organisation’s needs. As payrolling becomes increasingly important, we help you stay compliant, simplify processes, and deliver a clear, hassle-free payroll experience for employees.
Partner with Direct Payroll Services today to make payroll management seamless and stress-free.
Conclusion
Successfully managing payrolling benefits in kind relies on three key elements: compliance, accuracy, and clear communication.
Employers must ensure that all taxable benefits are correctly valued and reported, adhering to HMRC guidelines to avoid penalties. Regularly reviewing updates from HMRC and adjusting payroll processes accordingly keeps operations running smoothly.
Clear communication with employees about how their benefits are taxed builds trust and transparency, helping them understand deductions and boosting overall morale. Staying proactive ensures both the organisation and its employees benefit from a seamless, error-free payroll system.
Frequently Asked Questions
What does payrolling benefits in kind mean for employers?
It means reporting and taxing employee perks, like company cars or health insurance, directly through payroll. This removes most P11D admin, keeps records simpler, and ensures tax is collected on time based on the previous year for future pay periods.
How does payrolling benefits in kind affect employee income tax?
It spreads the tax on benefits across pay periods, so employees see smaller, regular deductions rather than large year-end bills. This makes take-home pay more predictable and easier to manage.
Which types of benefits in kind can be payrolled in the UK?
Most benefits, including cars, private medical insurance, and memberships, can be payrolled. Complex benefits like accommodation or low-interest loans are excluded at first but may be added later.
Are there any changes to mandatory payrolling of benefits in kind coming before 2027?
No. The rules remain voluntary until April 2027. Employers should still register with HMRC if they want to payroll benefits before that date.
How do I report payrolled BiKs to HMRC?
Employers report benefits through the Full Payment Submission (FPS) with each payroll. The details of benefits, including the benefit’s cash value, are added to taxable pay, shown on payslips, and sent directly to HMRC in real time, particularly for the end of year tax calculations.
Are employees impacted differently depending on whether benefits in kind are payrolled or not?
Yes. With payrolling, tax is collected gradually, reducing surprises. Without payrolling, tax is adjusted later through P11Ds, which can lead to sudden bills or confusing tax code changes.
What are the upcoming changes to mandatory payrolling of benefits in kind and when do they take effect?
From April 2027, payrolling becomes mandatory for most benefits, replacing P11D reporting. Employers must update payroll systems and prepare for real-time reporting of benefits through HMRC submissions.
What will be the impact of the mandatory payrolling on tax codes?
Tax codes will be simpler. Since benefits are taxed through payroll, HMRC won’t need to adjust codes later, reducing confusion and unexpected deductions for employees.
How can employers correct errors in payrolled benefits in kind reporting?
Mistakes can be fixed by adjusting the next payroll run and resubmitting accurate data through FPS. Employers should also update payslips and inform affected employees.
How does payrolling benefits in kind differ from reporting through P11D forms?
Payrolling collects tax on benefits monthly in real time, making it smoother for employees. P11Ds report benefits after the year ends, often causing delays, tax code issues, or underpayments.
How does benefit in kind tax work?
The taxable value of a benefit, like a car or loan, is added to an employee’s income. Tax is then calculated on this higher total pay.
What is a taxable benefit?
A taxable benefit is any non-cash perk an employee receives, such as a car, health cover, or subsidised loans, that counts as extra income for tax purposes.
How do you tax employees’ benefits and expenses through your payroll?
You can tax employees’ benefits and expenses through your payroll by adding the taxable value of perks, like cars or medical cover, directly to payroll.
What is the process for registering for payrolling benefits in kind?
Registering for payrolling benefits in kind requires employers to sign up with HMRC’s online service before the beginning of the tax year, so benefits can be taxed directly through payroll instead of reported later via P11Ds for a longer period.
Are there any benefits in kind that cannot be payrolled and must still be reported separately?
Yes. Even when payrolling BiKs becomes mandatory, some benefits still need to be reported on a P11D, particularly those requiring real time information. Examples include employer-provided living accommodation and interest-free or low-interest loans, as these involve complex valuation and tax rules.
What are the main advantages of payrolling benefits in kind versus traditional reporting?
Payrolling benefits in kind collects tax and NICs in real time through payroll, removing most P11D forms. Traditional reporting relies on year-end submissions, often causing delays, tax code changes, and surprise bills, while payrolling reduces admin and increases transparency in accordance with the new rules.
What are the steps to register for payrolling benefits in kind with HMRC?
To register for payrolling benefits in kind, log into HMRC’s Government Gateway, use the payrolling service, select which benefits to include, complete registration, and notify employees in writing about how this change affects their payslips and tax at the end of each tax year.
