In a significant policy update, the UK government has announced that, starting from April 2026, all employers will be required to implement payrolling benefits in kind. This move, aimed at simplifying tax reporting, transitions BIK reporting from an optional process to a mandatory one. While the change promises to reduce reliance on year-end forms like P11D and P11D(b), it also introduces new complexities that employers must address well in advance.
This article outlines the current system, the forthcoming changes, and the steps employers should take to prepare for the transition to payrolling benefits in kind.
The Current System: Reporting BIKs with P11D and P11D(b)
At present, employers report taxable benefits and expenses provided to employees using P11D and P11D(b) forms. Here’s how the process works:
- P11D Form: Employers calculate and report the taxable value of benefits provided to employees. These forms must be submitted to HMRC by 6 July following the tax year. Employees then settle any income tax liabilities through self-assessment or adjustments to their PAYE tax code.
- P11D(b) Form: This serves as:
- A declaration that all P11Ds are correct.
- A report of the Class 1A National Insurance Contributions (NICs) payable on those benefits.
Employers must pay the relevant Class 1A NIC by 19 July (or 22 July for online payments).
For employers who voluntarily use payrolling benefits in kind, most BIKs can already be taxed monthly via Real-Time Information (RTI). However, certain benefits, such as accommodation and low-interest loans, must still be reported using P11Ds.
Key Changes from April 2026: Mandatory Payrolling Benefits in Kind
The new rules mandate that payrolling benefits in kind must be processed through payroll, making it essential for employers to adapt their systems and processes. Key aspects of the changes include:
1. Real-Time Reporting
BIKs will be reported and taxed monthly (or weekly for weekly-paid employees) via the Full Payment Submission (FPS) system under RTI.
2. Class 1A NIC Reporting
Employers will now need to include Class 1A NIC liabilities in their monthly payroll submissions, eliminating the need for separate year-end declarations.
3. Granular Data Requirements
Employers will need to provide a detailed breakdown of BIKs, including data for internationally mobile employees and benefits provided by third parties.
4. Transition Period for Certain Benefits
Payrolling accommodation and low-interest loans will remain voluntary for 2026–27, with mandatory reporting expected in later years.
5. Removal of P11D Forms
From 2026–27, P11Ds will no longer be used to report most benefits. Employers must ensure their payroll systems can handle payrolling benefits in kind in real time.
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Challenges Employers May Face
While the shift to payrolling benefits in kind aims to simplify reporting, it comes with its own set of challenges. Employers will need to address these areas to ensure compliance:
1. Increased Data Management
- Employers must establish systems to collect detailed and accurate BIK data every month.
- Complex benefits, such as company cars, involve numerous variables (e.g., fuel types, personal mileage reimbursement, and car changes). Managing this information monthly can be resource-intensive.
- For benefits provided by third-party suppliers, employers need clear processes to ensure timely reporting.
2. Employee Movement
- Employers must monitor joiners, leavers, and internationally mobile employees to ensure accurate payroll reporting.
- The transition raises questions about tax code adjustments. HMRC systems will need to align seamlessly with the new process to avoid incorrect deductions or overpayments.
3. Payroll System Readiness
- Existing payroll systems may require updates to handle the increased volume of real-time data under payrolling benefits in kind. Employers must test these systems to avoid processing errors.
- The complexity of variable pay periods, such as irregular or four-weekly pay cycles, adds to the challenge.
4. Communication with Employees
- Employees will notice the changes in their payslips, as BIKs will now be taxed monthly under payrolling benefits in kind. Employers must clearly explain the new system and its impact on net pay.
5. Penalty Risks
- Errors in monthly reporting increase the risk of penalties. Although HMRC will adopt a “soft touch” penalty regime for 2025–26, employers should aim for accuracy from day one.
Steps to Prepare for Mandatory Payrolling Benefits in Kind
Given the scale of these changes, early preparation is key. Employers should consider the following steps:
1. Assess Payroll Systems
Evaluate whether your current payroll system can handle the new requirements for real-time payrolling benefits in kind. Implement upgrades or consider new software if necessary.
2. Establish Data Collection Processes
Develop robust systems for collecting BIK data, including information from third-party suppliers and benefits providers.
3. Test Voluntary Payrolling
Consider payrolling some benefits voluntarily from April 2025 to test your systems before P11Ds are phased out.
4. Train Payroll and Finance Teams
Equip teams with the knowledge and tools needed to handle payrolling benefits in kind reporting requirements.
5. Engage Employees
Communicate changes to employees early, explaining how payrolling benefits in kind affects their payslips and net pay.
6. Work with Specialists
Partner with tax and payroll experts to navigate the complexities of payrolling benefits in kind and ensure compliance.
HR’s Role in Managing the Transition to Payrolling Benefits in Kind
HR teams play a crucial role in ensuring both employee understanding and organizational compliance as payrolling benefits in kind becomes mandatory.
1. Employee Communication & Engagement
- Provide clear payslip breakdowns to show how payrolling benefits in kind impacts net pay and tax deductions.
- Conduct informational sessions or FAQs to address employee concerns and support tax-related queries.
2. Aligning Benefits Policies with Payroll Compliance
- Review and adjust existing benefit offerings (e.g., company cars, medical insurance) for tax efficiency under payrolling benefits in kind.
- Update HR software to track payrolling benefits in kind in real time, ensuring seamless payroll reporting and compliance.
3. HR’s Collaboration with Payroll & Finance Teams
- Maintain accurate monthly records of payrolling benefits in kind and ensure proper processing of leavers and joiners.
- Monitor internationally mobile employees to ensure payrolling benefits in kind is correctly reported and taxed in line with UK regulations.
Key Takeaways
The mandatory payrolling benefits in kind from April 2026 represents one of the most significant changes to employment tax in recent years. While it simplifies certain aspects of reporting, it also places a greater administrative burden on employers.
What employers should do now:
- Start preparing early to avoid last-minute challenges.
- Evaluate and upgrade payroll systems as needed.
- Train your teams and establish clear processes for payrolling benefits in kind reporting.
- Test voluntary payrolling to identify potential issues before the rules take full effect.
- Keep employees informed and engaged throughout the transition.
At WellTax, we understand the complexities of employment tax and are here to support you at every stage of this transition. Whether you need help with system readiness, training, or compliance, our experts can guide you to ensure a smooth implementation.
Contact us to learn more about how we can help with payrolling benefits in kind.
