Background
The government have recently announced that the introduction of mandatory payrolling of benefits in kind (‘BIK’) which had been due to start from 6 April 2026 has now been delayed until 6 April 2027. In addition, there will be no penalties during the first year of operation, except for any gross abuse of the system.
The delay follows the raising of concerns and recommendations from ICAEW and other stakeholders regarding the increased costs faced by business in complying with updated payroll software and the need to provide extra time for business to prepare for the changes.
Currently employers are required to report benefits and expenses provided to employees and directors electronically on form P11D by 6 July each year following the end of the tax year. This process will now continue for another two years unless a business chooses to voluntarily adopt the payrolling of BIKs.
Detail
Employers will now have until April 2027 to prepare for mandatory reporting of income tax and Class 1A National Insurance contributions (NICs) on benefits in kind via payroll software, known as mandatory payrolling.
From April 2027, most benefits will need to be processed via a payroll on a real-time basis with pay as you earn (PAYE) and class 1A national insurance contributions (NICs) paid during the tax year.
The data fields on the full payment summary (FPS) will be expanded to match the current P11D reporting. Employees will need to be informed of the value of payrolled benefits by 1 June following the end of the tax year, although there will be no prescribed format for this reporting.
In regard to penalties in the first year of mandatory payrolling it has also been announced that there will be a soft landing during 2027/28, with penalties for BIK-related inaccuracies not expected to apply except in the case of deliberate non-compliance. The existing penalty regime will continue to apply to reporting under real-time information (RTI) and the current P11D process.
Employers will not need to register for the payrolling of BIKs from April 2027, other than to voluntarily payroll loans and accommodation BIKs, since it will become the default position for reporting all other BIKs. For those employers who wish to adopt the process earlier then they can voluntarily register to payroll BIKs for the 2026/27 tax year. This must be done before the start of the tax year since there is no facility to register during the tax year. As such the registration deadline for payrolling of benefits for 2026/27 remains as 5 April 2026.
Payrolling of employer-related loans and accommodation will continue to be voluntary from 6 April 2027 due to the way the value of those benefits are calculated. It is not clear when payrolling of those benefits will become mandatory. Therefore, forms P11D and P11D(b) will be retained for the foreseeable future to account for those benefits, as well as potentially for globally mobile employees on modified payrolls.
Employers will however be able to voluntarily register for payrolling loans and accommodation from April 2027. It is expected that the registration for this will be available from November 2026. Employers would then need to complete the registration before 5 April 2027 in order for it to be effective for the 2027/28 tax year.
Impact on tax codes
Employees tax codes will be updated before April 2027 to remove BIKs, but any underpayments from prior tax years will remain within the tax code. If employees are concerned about cashflow during the first year of payrolled benefits (as they may still also be paying the tax on a non-payrolled benefit from the previous tax year), they may contact HMRC to request that the underpayment is spread out over a longer period. Communication with employees will therefore be important to give them time to contact HMRC before the changes impact their take home pay.
HMRC have also provided some additional information on the process for updating BIK calculations related to under or over payments of tax and NICs. The process must be completed by 6 July after the end of the tax year, although further details are expected to be provided in the future.
The general rule is that employers will need to divide the cash equivalent of the benefits and expenses they will be providing across the number of relevant pay periods for each employee. A reasonable estimate can be used if the value is not known at the start of the year. Any changes in value should then be spread out across the remainder of the tax year. Additional tax due or repayable will be managed via the individual’s P800, simple assessment or self-assessment process, with adjusted class 1A NIC due by 22 July.
HMRC have also provided further details on some less common situations that employers might encounter, including:
- employees affected by the 50% overriding regulatory limit;
- employees with no earnings;
- BIKs provided after leaving an employment;
- employees with unusual pay periods; and
- employees with no earnings other than BIK.
It is understood that draft legislation and guidance will be published later this year on reporting changes to BIKs.
With this additional 12 months now available before the payrolling of BIKs becomes mandatory it is important that employers use the time to plan for the change.
In the meantime, it is important to remember that P11ds for 2024/25 will be due for submission to HMRC by 6 July 2025 with any Class 1A NIC payable by 22 July 2025.
If you would like further information on any of the points raised above, assistance with preparing P11ds or more generally in relation to employment related benefit in kinds please contact our Tax Director, Jenny Marks.