The UK government’s plan to modernize the tax system by mandating the payrolling of Benefits in Kind (BiK) has been a significant topic for employers, payroll providers, and software developers. Originally set to take effect from April 2026, the mandatory payrolling of BiK has been delayed to April 2027, giving businesses an extra year to prepare for this major shift. This blog explores the implications of the delay, what mandatory payrolling entails, and how employers can prepare, drawing on the latest updates from HMRC and industry insights.
Benefits in Kind, such as company cars, private medical insurance, and gym memberships, are non-cash benefits provided to employees that are subject to income tax and Class 1A National Insurance Contributions (NICs). Currently, employers report these benefits annually via P11D and P11D(b) forms, due by 6 July following the tax year, with Class 1A NICs payable by 19 July (or 22 July if paid electronically). This process often leads to delays in tax collection, with adjustments made via employees’ tax codes, sometimes causing confusion or unexpected tax bills.
In January 2024, HMRC announced that mandatory payrolling of BiK would begin in April 2026, replacing most P11D and P11D(b) submissions. However, HMRC confirmed a delay until 6th April 2027 following feedback from stakeholders, including the ICAEW, payroll providers, and software developers. The primary reasons for the delay include:
System Complexities: The transition requires significant updates to payroll software, with an estimated 100+ new FPS fields needed to match current P11D reporting. Software developers need time to design, test, and roll out these changes.
Employer Readiness: Many businesses, especially smaller ones, require additional time to adapt processes, train staff, and ensure accurate data collection for real-time reporting.
Stakeholder Feedback: Consultations with accountancy bodies, businesses, and software providers highlighted the need for a smoother transition to avoid disruption.
The delay provides a structured step program for preparation, with HMRC planning to release initial software specifications in December 2025 and final specifications in the second half of 2026.
From April 2027, employers must:
Report BiK via FPS: The taxable value of benefits will be included in regular payroll submissions, with income tax and Class 1A NICs calculated and paid in real-time. This eliminates the need for most P11D and P11D(b) forms.
Calculate Cash Equivalent: Employers will calculate the annual cash equivalent of each benefit, divide it by the number of pay periods, and include it in the employee’s taxable pay. Adjustments can be made mid-year if the benefit value changes.
Notify Employees: By 1 June following the tax year, employers must inform employees of the value of payrolled benefits, though no specific format is required.
Exceptions: Employer-provided accommodation and beneficial loans will remain voluntary for payrolling due to their complex valuation. P11D and P11D(b) forms will still be used for these benefits and for globally mobile employees with modified payrolls.
Increased Monthly Administration: Real-time reporting shifts the administrative burden to monthly payroll cycles, requiring accurate and timely data, especially for benefits like company cars that may involve third-party providers.
Risk of Double Taxation: In the 2027/28 tax year, employees may face overlapping tax deductions from prior-year P11Ds and new payrolled benefits. HMRC suggests employees can contact them to spread underpayments over a longer period to mitigate cashflow issues.
Overriding Limit: Tax deductions cannot exceed 50% of an employee’s pay in a given period. Excess amounts can be carried forward or collected via year-end reconciliation or self-assessment.
Soft Landing for Compliance: During the 2027/28 tax year, HMRC will adopt a “light touch” approach, applying penalties only for deliberate non-compliance. Existing penalties for late filing or payments will still apply.
Real-Time Taxation: Employees see tax deductions on payslips, improving transparency and reducing unexpected tax bills.
Reduced Year-End Admin: Eliminating most P11D forms simplifies compliance, saving time and resources.
Fewer Tax Code Adjustments: Real-time reporting minimizes mid-year tax code changes, reducing employee confusion.
Data Management: Employers must ensure accurate, real-time data flow, especially for benefits provided mid-year (e.g., private medical insurance starting in September).
Software Updates: Payroll systems must be updated to handle new FPS fields and Class 1A NIC calculations. Smaller employers using HMRC’s Basic PAYE Tools will rely on updates by April 2027.
Employee Communication: Clear communication is essential to explain changes to payslips and tax implications, particularly during the transition.
Start Early: Consider voluntary payrolling in the 2026/27 tax year to test systems while P11D remains an option. Registration for voluntary payrolling is required by 5 April 2026 via HMRC’s online service.
Assess Systems: Work with payroll software providers to ensure compatibility with new FPS fields. Test systems to minimize errors.
Train Staff: Prepare payroll teams for real-time reporting and ensure they understand benefit valuation processes.
Communicate with Employees: Inform employees about the transition, how it affects their payslips, and the benefits of real-time taxation. Provide a Q&A document to address common concerns.
Consult Experts: Engage payroll or tax specialists to navigate compliance and optimize processes. At Clever Accounts we have started training on the processes and are well placed to submit your BIKs with the monthly or weekly payroll.
For the 2024/25 tax year, employers must submit P11D and P11D(b) forms by 6 July 2025. Late submissions incur penalties of £100 per 50 employees per month, with additional fines for inaccuracies (up to £3,000 per form) and late Class 1A NIC payments.
If you have any benefits in kind or just want to discuss, please get in touch with your dedicated accountant or call us on 0113 5188800.
The delay of mandatory BiK payrolling to April 2027 offers employers a valuable opportunity to prepare for a significant shift in tax administration. By adopting voluntary payrolling early, updating systems, and communicating clearly with employees, businesses can ensure a smooth transition. Stay informed through HMRC’s upcoming guidance, expected in Employer Bulletins and draft legislation in late 2025, and consult professionals to navigate this change effectively. For more details, visit HMRC’s payrolling guidance.
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