HMRC has recently confirmed that from April 2027, all employers in the UK will be required to process benefits in kind, (BIKs) such as company cars and medical insurance, through their standard payroll. The aim is to simplify the process of reporting and paying income tax and Class 1A National Insurance Contributions (NICs). In this blog, I’ll be sharing what employers need to know about these upcoming changes, and how they will affect both businesses and employees.

Overview of Reporting

What Are Benefits in Kind (BIKs)?

Benefits in kind (BIKs) are often defined as ‘non-cash’ perks that an employer provides to their employees. They include perks such as company cars, medical insurance, or gym memberships. Currently, these benefits are reported to HMRC via Forms P11D and P11D(b) by 6 July following the end of the tax year. Employees then pay the associated income tax on these benefits through self-assessment or PAYE adjustments, while the employer pays the Class 1A NIC to HMRC.

With HMRC’s agreement, however, employers can choose to ‘payroll’ certain benefits in kind. This means that instead of filing a P11D, the employer withholds the tax for these benefits directly through the employee’s payroll. This reduces the admin for employers, because P11Ds are only needed for benefits that can’t be processed via payroll (such as accommodation and loans subject to interest at less than the official rate).

Benefits in Kind: What’s Changing?

What’s Changing?
In April 2027, HMRC will make payrolling BIKs mandatory for all employers. The government’s aim is to simplify the tax system and reduce the burden on businesses. However, there are some important considerations for employers:
Mandatory Payrolling for All Benefits: From 2027, employers will no longer have the option to exclude certain benefits from the payroll. This means more data management and reporting will be needed to ensure compliance with the new rules.

Beneficial Loans and Accommodation Exemptions: Certain benefits, like employer-provided living accommodation and interest-free or low-interest loans, will still need to be reported on the P11D form, though employers will have the option to payroll them voluntarily.

Consultation and Guidance: HMRC has confirmed that further details, including draft legislation, will be published later in the year as part of the tax legislation cycle. Employers will need to stay updated as these proposals are developed.

What Should Employers Be Doing Now?

Employers need to prepare for the shift. Here are some key areas that I think all employers need to consider sooner, rather than later:
Review Data Management Systems: With the new requirement to report all BIKs through payroll, it’s crucial for employers to ensure their systems are capable of handling the increased data flow. This might require coordination across different departments to ensure timely and accurate reporting.

Assess the Impact on Employees: Payrolling all BIKs could have an impact on employees’ cash flow, particularly for those with taxable benefits that vary throughout the year. Employers should anticipate these challenges and be ready to communicate the changes clearly to employees.

Understand the Payroll Impact: Employers need to check if their payroll software can support the payrolling of all BIKs. There may also be additional costs for software upgrades or testing required to ensure compliance.

Prepare for Increased Compliance Risks: As income tax for BIKs is administered through PAYE, employers will need to be vigilant about compliance to avoid penalties for errors. This will become more critical as the volume of BIKs processed through payroll increases.

Consider the Impact on Benefits for Leavers: The process for handling last-minute benefit changes, such as when an employee leaves the company, will need to be reviewed. This is especially important for benefits with high BIK implications like company cars.

Worth Bearing in Mind…

Employers can begin preparing for mandatory payrolling from 6 April 2027, but can also choose to opt in early, giving enough time to familiarise themselves with the new process. While this transition aims to simplify tax reporting, it’s important for businesses to carefully evaluate the potential impacts on their operations, employees, and compliance procedures.

As always, staying informed about updates from HMRC and consulting with tax professionals will be crucial in navigating these changes effectively. If you have any questions about how this will affect your business or how to prepare, I’d be more than happy to help you find the answers.