Payrolling Benefits in Kind from 2027

At the beginning of 2024, the Conservative Government announced a significant change affecting businesses and their payroll. As part of the wider digital transformation occurring within HMRC, from April 2027 it’ll become mandatory for employers to payroll Benefits in Kind.

Benefits provide a significant advantage to both employees and employers. However, the fact that some require tax payment, can make them more complex than they may seem.

What are Benefits in kind?

Benefits in Kind (BIK) are benefits provided to employees from their employer which aren’t part of their salary or wages.

Common examples include:

• Company cars
• Medical or dental insurance
• Health cash plans

The Government provides an extensive list of all benefits and whether they’re taxable or not.

Despite not all benefits being taxable, all those that are must be properly declared to HMRC.

With this new upcoming change, all BIKs will need to be reported and taxed through payroll except for low or interest free loans and living accommodation provided by the employer.

 

What’s the situation now?

Currently, you have two options when payrolling benefits:

• Submitting P11D forms – the traditional method of reporting employee benefits for tax purposes.
• Registering the payroll benefits in kind – allowing the benefits to be taxed in real time through PAYE.

In fact, since 2016, employers have actually had the option to voluntarily payroll most employee benefits as long as they registered with HMRC before the start of the tax year in which they planned to start doing so.

 

What does this mean for Payroll moving forward?

By adding the cash equivalent of the benefit to the employee’s salary each pay period, you can streamline tax collection. This approach allows employees to pay the tax on their benefits in real time, reducing the amount of paperwork at the end of the tax year. In fact, it’ll eliminate the need for 4 million end-of-year returns to be submitted to HMRC.

During the first year, employees will need to know:

• Their tax code will change to remove the adjustment for their BIK.
• Their Payroll team will process this, and employees will pay tax on that amount spread across the year at each pay period (e.g. monthly, bi-weekly).
• At the end of the year, employees will be informed of the total taxable benefit they’ve received and what it was for. It’s also important to reassure employees they won’t be taxed twice because you’ve registered to payroll their benefits with HMRC before the start of the new tax year.

 

What are the advantages & disadvantages of this new way of reporting?

Advantages:

• Saving on time and reducing on admin.
• Fewer forms to complete at year-end – including P11D and P46 forms.
• Simpler tax codes & tax codes should change less frequently.
• More accurate tax deductions in monthly payroll.
• Agents acting on behalf of clients (who have authorisation to process payrolls related to PAYE) can also register for BIK for 2025/26, whereas previously clients had to register themselves. So this takes the hassle away from them.

Disadvantages:

• The initial registration process for employers can be lengthy.
• For the first two years, employees may pay higher tax due to underpayments of their BIKs from previous years. This will end by year three.
• You’ll still need to submit a P11D(b) form, regardless of whether benefits have been taxed via P11D forms or via payroll.
• Non-taxable benefits still need to be declared using a P11D form.
• Once payrolling BIKs have been registered and are part of payroll, you can’t switch back to P11Ds during the tax year.

 

What steps can you take?

It may be worth considering payrolling some, or even all, of your BIKS now on a voluntary basis to give yourself time to test this new system.

But do ensure that…

• Your current payroll process will be able to handle this new development. If not, the decision will have to be made as soon as possible whether you’ll be upgrading or replacing your software.
• Communicate to employees, especially how these changes will affect their pay and tax.
• Payroll and HR staff will need to understand the changes being made so that they can handle queries and make any necessary changes. Something to consider would be BIKs for new starters and leavers, and how this will be handled. For example, company cars – will they be keeping it, handing it back, or liable for a termination payment?
• Keep up to date regarding any HMRC developments and guidance regarding mandatory payrolling.
• Or is it maybe time to reconsider your benefits package altogether? You may want to add, remove, or adapt current benefits before things are enforced.

Draft legislation is due to be published providing further information and guidance for employers. Further guidance will also be made available in advance of the new change coming about before 6 April 2027.

It’s best to start preparing now so you’re not stressed by the time it comes around. It may be an adjustment to start off with, but that’s what our team’s here for.

For more information on registering payroll benefits with HMRC via the online service, read more on gov.uk.

 

ARE YOU READY TO MAKE THE MOVE?

Get in touch to see how we can support you with our outsourcing Payroll services, and we’ll ensure your business and your team are on the right software in time for the change.

For more information about our Payroll service and fees, book a FREE consultation today, or speak to your main contact at TC Group.

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Update 15/05/25 – HMRC extended deadline date from April 2026 to April 2027.