Reforms to the Benefits in Kind (BIK) system have continued to change in recent years, as the Government prepares to roll out mandatory payrolling.
From April 2027, businesses will be required to payroll BIK, but this will now be a phased approach, with the full reforms in place from April 2028.
For employers who were expecting to do away with the P11D process in the main from next year, this means that most will still need to complete and submit P11Ds for 2026/27 and, for any benefits not yet payrolled, for 2027/28.
The new phased approach to payrolling BIK
HMRC confirmed earlier this year that in April next year, employers will only need to payroll BIK for the following benefits:
- Company cars and car fuel
- Company vans and van fuel
- Employer-provided medical benefits
From this date, Income Tax and employer National Insurance Contributions (NICs) on these benefits must be paid using the same real-time system as the rest of PAYE.
HMRC intends its Real Time Information (RTI) system to handle the payrolling of most BIK from April 2028.
The exceptions are employment-related beneficial loans and living accommodation.
Employers providing either of these will still need to complete P11Ds for the relevant employees each year.
HMRC is also weighing up whether to keep P11Ds for a small number of specific situations, such as internationally mobile employees on modified payroll arrangements. We are still waiting for HMRC to publish further details on this.
For 2028/29, every other benefit must be processed through your payroll, with the associated Income Tax and Class 1A National Insurance paid in real time.
What is the expected impact of the changes?
First and foremost, you will need to prepare your payroll processes to incorporate real-time reporting of BIK.
This should be relatively straightforward, but it still makes sense to ensure your team and systems are prepared.
You will need to report more information than before, on a more regular basis, which may lead to more payroll errors, so don’t leave preparations too late.
In the first year of payrolling BIK, there may also be cash flow implications for the business and employees.
In 2027/28, an employer will pay the final P11D-based Class 1A bill for 2026/27 in July 2027. In the same year, it will also pay Class 1A on 2027/28 benefits in real time. That’s roughly two years’ worth of Class 1A leaving the business within one year.
For employees, the same doubling up can happen, as the tax on benefits reported on a P11D is often collected after the event through Self Assessment the following January or through a tax code adjustment in a later year that recovers an underpayment.
In the first year of payrolling, an employee could still be paying off the previous year’s benefit tax while also having tax on their current benefits deducted from each pay packet.
Need help with the upcoming BIK reforms?
Businesses are being encouraged to act early on these changes to ensure they understand the cash flow implications and reporting rules of this new mandatory payroll requirement.
If you would like help updating your payroll process or need support managing your payroll, please get in touch.
