USA Payrolling benefits in kind
HMRC announced in January that reporting and paying income tax and Class 1A NIC on benefits in kind (BIKs) through payroll will become mandatory from April 2026. For most this won't come as a surprise, given voluntary payrolling of benefits has been in place since 2016 and many UK employers are already payrolling common types of benefits, such as private medical insurance and company cars.
HMRC has indicated that this will include all benefits including employment related loans, living accommodation and amounts made good by employees, which have previously been excluded from voluntary payrolling due to their complexities. This will mean that from the 2026/27 tax year, income tax and Class 1A NIC due on BIKs must be reported to HMRC in real time through payroll and no longer reported annually via P11D and P11D(b) forms.
What do we know?
On the face of it there are positives to simplifying and modernising the reporting process, including:
- Significant reduction in the need to issue coding notices to employers when an employee’s tax code changes, alleviating the need to adjust an employee's tax code the year after the benefit was received
- Increased transparency to employees of their income and taxes shown directly on their payslip, resulting in fewer queries to HMRC and employers
- Administrative efficiencies for employers and HMRC - over 300,000 P11D(b) forms were submitted to HMRC for the 2022/23 tax year. By payrolling all benefits the annual exercise of P11D completion is removed
- Removing the risk of employers who currently payroll their benefits forgetting to submit their P11D(b) to report Class 1A NIC liability, or employers who aren't currently payrolling their benefits missing the filing deadline
However, as with any fundamental change to reporting requirements, the impact on time and resources for employers needs to be assessed. For smaller employers (1-50 employees) in particular, it may prove an onerous task to ensure they are capturing reportable expenses and benefits in real time. They will also need to consider available internal expertise to ensure the correct tax calculations are completed and reported.
What do employers need to consider?
HMRC is consulting with stakeholders, including Evelyn Partners, to develop its approach, however there is a lot to consider and a relatively short time frame to prepare. We are waiting for draft legislation and further information is expected to be released via employer bulletins.
While the consultation process will allow stakeholders to raise concerns and feedback to HMRC on how the calculation and reporting requirements will be changed, there are some obvious practicalities to consider:
- It can be difficult to determine some BIKs accurately before the end of the tax year, notably employment related loans and living accommodation
- Some individuals might experience cash flow issues during the 2026/27 tax year if there is an overlap between PAYE code adjustments for prior years taking effect and mandatory payrolling commencing
- Additional real time information (RTI) reporting fields will be required for the new mandated payrolling of benefits, so there will be a need to engage with software providers early to minimise the potential for reporting errors
In the light of these challenges it is possible that HMRC might seek to transition the arrangements, or potentially introduce greater flexibility to PAYE Settlement Agreement arrangements to provide employers with more options and greater time to prepare.
How can Evelyn Partners help?
This is a complex area and represents a fundamental change to payroll reporting for employers. We can keep you updated ahead of the changes and support with implementation requirements, including:
- Drafting clear and concise employee communications. Employers will need to explain clearly the upcoming changes and how this will impact their employee population
- Process mapping of your benefit data collection and reporting sources, assessing your payroll cut off dates and planning for any changes to timelines
- Support with benefit calculations in line with your pay periods and in-year changes to benefits provided to your employees
- From May 2024 authorised agents will be able to register to use HMRC payrolling of benefits and expenses online services, providing the agent has the correct permission. Evelyn Partners can work with you to register ready for payrolling
- Preparing in advance of the changes will be key to minimise disruption to your business and employees. If not already in place, you may wish to consider voluntarily payrolling some of the more common types of benefits from April 2025 to test your systems and processes and allow time for employees to adjust
If you would like to discuss this further, please reach out to Susan Elsdon or your usual Evelyn Partners contact.
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By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2024/25.
