If you have ever travelled on the London Tube service, you will have come across the expression “all change.” This means that the line you are currently on does not proceed further, and you need to board another train.
In January 2024, His Majesty’s Revenue and Customs (HMRC), issued guidance that, from April 2026, all employers will be required to payroll benefits in kind (BIKs). This is a momentous change for UK payroll, as BIKs will be mandatory rather than voluntary, as is currently the case.
As a reminder, the current position (unless an employer is already payrolling their benefits) is that the taxable value of all benefits and expenses provided to employees must be reported via specific forms [P11D and P11D(b)] by 6 July following the end of the relevant tax year.
This involves calculating the amount to report, completing necessary forms, and submitting them to HMRC normally using proprietary software (the exception being the smallest employers that can use HMRC’s software). The employee pays the income tax due through self-assessment or adjusting their pay-as-you-earn (PAYE) tax code. The employer must pay the relevant Class1A National Insurance by 19 July following the end of the tax year, or 22 July for online payments.
The positive news from this legislative change is that it should mean there will no longer be a requirement to prepare P11D forms for employees each year. The challenge for payroll professionals is that BIKs will be required to be payrolled monthly in real time. However, HMRC has not stated whether P11D forms are to be abolished. It could well be that the reporting position for certain benefits which cannot currently be payrolled, such as beneficial loans and accommodation, may not change. As mentioned previously, some employers have been voluntarily payrolling BIKs. To do this, the employer should apply to HMRC to obtain agreement to payroll the BIKs so that the benefit is reported and subsequently taxed under RTI (Real Time Information). This arrangement did not apply to accommodation benefits or loans with interest charged at less than the official rate which still had to be reported on the P11D form.
Payroll professionals and HR teams are thankful for the two-year period to plan for the changes. There have been previous changes, such as the abolishment of paper P11D forms in 2023 that had payroll professionals scrambling for a solution to the imposed last-minute changes. There are many areas that will be impacted by this latest change and will require an action plan ranging from communication to employees to payroll processes which will need to be reviewed, updated, and other administrative changes surrounding BIKs. These will need to be project-managed very carefully.
Payrolling BIKs is quite common in other countries. For global payroll professionals, the change should not be a foreign concept. The move to payrolling benefits allows tax authorities to collect revenue (taxes) on the benefits monthly in real time. Therefore, any changes in value in relation to the BIK can immediately be accounted for and the revenue collected monthly via employers, through the payroll. (From a tax authorities’ standpoint, this is a very cost-effective way of collecting revenue!)
What Should Employers Be Doing Now?
As with any changes impacting employees, timely communication is key to ensure that employees are clear on how the move to payrolling benefits will impact them directly—how it will appear on their payslips and what the financial change will be to them, if any.
There may be instances where employees could have two years’ worth of benefits on which tax must be collected in one tax year and this could represent a significant cost for some employees, and while it represents a timing difference rather than an additional cost, the impact on net pay should not be ignored or underestimated.
Payrolling of benefits may result in an increase in an employee’s earnings which could negatively affect their entitlement to statutory benefits. This would be an unwelcome surprise for some employees.
Key Areas to Review
The finer details regarding benefits and how they will work in all payroll scenarios are still being refined. However, the following lists some key areas that professional payrollers should review ahead before the changes go into effect.
Some of these areas may not have immediate solutions, or you may not know the answer, but the following points are intended to get teams thinking about and planning for all possible issues:
- Benefits will need to be correctly reported for real-time payroll reporting. How will this impact your current process flows for joiners and leavers? How will you communicate this to employees, and will these additional responsibilities be more complicated for your payroll team?
- What will the impact of mandatory payrolling be on tax codes? Will HMRC update its systems to ensure everyone with a BIK restriction’s tax codes are correctly updated for tax year 2026/2027?
- When employers grant company cars to employees, they must follow complex rules regarding fuel type, personal mileage reimbursement, and car changes. The payroll team will require a substantial amount of information. Remember, not all leases start and end on 5 April, so payroll teams must deal with changes during the tax year.
- When assessing relocation costs, who will be responsible for considering what element would be qualifying and whether the tax exemption can be applied for?
- If your organisation has an external benefits provider, how quickly can the required monthly changes be sent through to your payroll team to ensure payroll reporting deadlines are not missed?
- Who within the payroll or finance teams will be responsible for sourcing and collating benefits data, and checking that taxable values are correct monthly?
- What will this new process look like and will be it be robust to capture all information that is required?
- Do your current payroll reporting systems need to be reviewed in line with the change that BIK reporting will have on your monthly reporting?
It is fair to state that the increased number of calculations, and the value of tax being collected through the payroll, increases the chances of errors. It is therefore important for payroll professionals to ensure that the systems being used either by themselves or their outsourced provider have been thoroughly assessed and that they are aware of the potential risks.
Payroll professionals should be working with their organisations to ensure that the data collection and payroll systems are ready for payrolling benefits. They must also ensure that systems or support for the calculation of benefits in each pay period are in place.
Communicate the impact of the changes to employees. They will need to be able to plan for the impact on their net pay.
At the start, I mentioned the fact that HMRC has provided payroll professionals with a good lead time on this change; do not leave it to the last minute. Use the time to assess your readiness and the systems in place for payrolling BIKs. You may want to consider payrolling some or all your benefits from April 2025 on a voluntary basis to give yourself time to evaluate the system while P11D forms are still available as a backup.
There are examples on the HMRC website of payrolling benefits and how to calculate the financial value to attach to the benefit. See the guidance: Payrolling: changes affecting benefits and expenses. My advice to payroll professionals would be to use this time to ensure that when April 2026 arrives the payrolls under your control are compliant and that this change will pass without any challenges.