Mandatory Payrolling of Benefits in Kind: A Practical Overview for Payroll Professionals
The Shift Towards Real-Time Reporting
From April 2027, most Benefits in Kind (BiKs) and employment-related expenses will be subject to mandatory payrolling. This transition will require employers to report taxable values via the Full Payment Submission (FPS) within Real Time Information (RTI), ensuring both Income Tax and Class 1A National Insurance Contributions (NICs) are accounted for each pay period. Unlike the current voluntary system, where only limited data is required, HMRC will require greater visibility to enforce compliance and reduce the need for manual interventions.
Employers must begin preparing for this shift by understanding the data requirements that will align with P11D and P11D(b) reporting. Although some benefits such as loans and accommodation will initially remain voluntary, they too are expected to fall under mandatory rules in due course. This increased transparency is intended to streamline tax collection and reduce the administrative burden in the long term.
Calculating and Reporting BiKs Accurately
The method for calculating BiKs under payrolling will mirror existing voluntary practices. Employers must divide the annual cash equivalent of each benefit by the number of relevant pay periods. This amount must then be included in the FPS alongside earnings, incurring both Income Tax and Class 1A NICs.
Where the value of a BiK is not known at the start of the year, a reasonable estimate is required. Adjustments should be made if the actual value becomes known later or if the benefit changes. Employers must avoid inputting a zero value in situations where a material benefit is expected.
In cases where BiKs are identified after the start of the tax year, employers can begin reporting them in subsequent pay periods without the need to amend earlier FPS submissions. Additionally, any under- or overpayments discovered after year-end can be corrected through the BiKs update process, which must be completed by 6 July following the tax year. This process will feed into the P800, Simple Assessment, or Self Assessment processes as appropriate.
Managing Edge Cases and Operational Considerations
Several complex scenarios require careful attention. Employees with low earnings, for instance, are subject to the 50 percent regulatory limit, meaning no more than half their pay may be withheld for tax. In these cases, employers must carry forward excess amounts and uncollected taxes will be reconciled post-year-end.
Similarly, employees who receive BiKs after leaving employment or directors who receive no cash earnings must still have their BiKs reported in the FPS. Any tax not collected through payroll will be addressed through HMRC's existing end-of-year reconciliation processes.
Employers operating different payroll frequencies must also adjust their calculations accordingly. For example, if a tax year has 53 weekly pay periods, this must be reflected in the division of annual BiK values. Meanwhile, annual payrolls may report the full benefit amount in one instance.
Preparing for Implementation and Ongoing Compliance
In anticipation of these changes, employers will not need to register to payroll most BiKs from April 2027. HMRC will automatically remove BiKs from employee tax codes, with exceptions for loans and accommodation which will still require registration.
Penalties for inaccuracies in the first year of mandatory payrolling (2027 to 2028) will not be imposed unless deliberate non-compliance is identified. However, existing penalties for late filing and payment will continue to apply. From the 2028 to 2029 tax year onwards, a more comprehensive penalty regime will be introduced, with further guidance to follow.
Employers will also remain responsible for issuing employees with end-of-year statements summarising payrolled benefits by 1 June following the tax year. Although not mandated to appear on payslips, software providers may offer the option to display BiK information in response to customer demand. Employers are encouraged to educate their employees on how to access this information via their HMRC personal tax accounts or the HMRC app.
This upcoming reform to BiK payrolling represents a significant operational change for payroll teams. Early preparation, systems alignment, and process reviews will be essential to ensure a smooth transition and to maintain compliance with HMRC’s evolving requirements.