What UK employers need to know about payrolling Benefits in Kind

Reporting Benefits in Kind (BIKs), such as company cars or private medical insurance offered as part of an employment package, are changing. From April 2027, UK employers must report and tax BIK through payroll – and there are a few things you’ll need to do now to prepare.

What has changed?

Currently, employers report BIKs at the end of the tax year using P11D forms, paying Class 1A National Insurance Contributions (NICs) afterwards. However, this left many employees unsure about the tax implications of their benefits and created a large year-end workload for payroll teams.

From 6 April 2027, HMRC will require all taxable BIKs to be processed through payroll in real time. Employers will need to include the cash equivalent of each benefit on employees’ monthly payslips, calculate tax and NICs, and report the details via the Full Payment Submission (FPS).

This change aims to make BIK taxation more transparent, reduce year-end adjustments and simplify compliance.

The impact of real-time BIK reporting

Shifting from annual reporting to monthly payroll deductions will mean big changes for payroll teams, HR, and finance. Real-time payrolling ensures employees pay tax on their benefits as they receive them, providing immediate clarity on take-home pay. For payroll teams, it spreads the workload throughout the year instead of concentrating it at year-end.

However, not all payroll systems are currently set up to capture these benefits in real time, making it difficult to produce HMRC-compliant FPS reports, or maintain supporting evidence for audits.

This means employers will need to assess software capabilities, update internal processes, and ensure cross-department collaboration between payroll, HR, finance and IT in good time before April 2027.

Preparing for payrolling BIKs

It is essential that employers begin to prepare by identifying all taxable benefits, ensuring accurate tracking and closing any gaps in data capture. Payroll systems must be able to record the cash value of benefits at the point they are provided, integrate with monthly payroll runs and FPS reporting and display taxable benefits clearly on employee payslips.

It’s also really important to maintain an audit trail. Employers should digitise receipts, usage logs, and other supporting evidence linking benefits to payroll entries.

Clear communication with employees is another critical aspect of the change, because moving BIKs into payroll will affect net pay and payslip formatting and explaining the changes in advance helps prevent confusion.

What changes for Year-End

With the introduction of payrolling BIKs, the annual P11D and P11D(b) forms will largely become obsolete. Employers will still provide a consolidated annual summary of payrolled benefits by 1 June, allowing employees to reconcile their total benefits with HMRC records.

Employers who act now to review to review software, update processes and plan for a communications roll-out to staff, can really help reduce the administrative burden as the deadline approaches.

For a detailed guide on how to prepare your payroll systems and processes for the new BIK reporting requirements, Monahans has published a comprehensive guide to Payrolling Benefits in Kind which you can read here: https://monahans.co.uk/resources/publications/Monahans-A-Guide-To-Payroll-BIK.pdf

If you have any further questions, get in touch with Neil Manuel.

Neil Manuel