Mandatory payrolling of benefits in kind begins next April
Employers providing company cars, vans or medical benefits to their staff are being urged to prepare for the mandatory payrolling of benefits in kind (BiKs).
Ed Mole, Assistant Payroll Manager at South West accountancy firm Milsted Langdon, warns that businesses leaving their preparations until the new tax year risk reporting errors and penalties, as well as a rise in queries from employees confused by changes to their pay.
From 6th April 2027, employers will be required to report company cars, car fuel, vans, van fuel and employer-provided medical benefits through payroll in real time, with Income Tax and Class 1A National Insurance contributions reported through the same process. For these benefits, the annual P11D will no longer apply.
Most remaining BiKs will follow from 6th April 2028, while employment-related loans and living accommodation will stay outside the mandatory regime.
HMRC opted for this two-stage approach following feedback from employers and the payroll software industry.
Ed said, “Payrolling benefits in kind should simplify the way employers report benefits and collect the associated tax from employees, bringing the process more closely in line with Real Time Information reporting.
“Having benefits processed consistently through payroll, alongside regular updates and clearer communication, should also help reduce errors and employee queries about tax codes.”
However, he cautions that the phased introduction brings its own challenges, particularly during the 2027/28 tax year when many employers will be payrolling some benefits while continuing to report others separately.
He added, “The phased approach may create some initial confusion around which benefits are subject to mandatory payrolling and which remain voluntary or require registration.
“This will be a new process for many payroll professionals, so additional training and updated procedures may be needed to make sure benefits are calculated and reported correctly.
“Payroll software readiness is another key consideration. Employers and payroll providers will need to make sure their systems can capture and report the required information accurately through the Full Payment Submission, potentially within a relatively short implementation timeframe.”
Ed also expects an initial administrative burden as employers and their payroll teams get to grips with the requirements, from reviewing existing processes to setting up new procedures for collecting and validating benefit information.
He continued, “There will be greater importance placed on obtaining accurate and timely benefit information, as changes may need to be reflected through payroll during the tax year. That could be challenging where the information comes from different departments or third-party providers.
“Although HMRC may provide some transitional easements as businesses adapt, employers will ultimately be responsible for making sure benefit information is reported accurately and on time. Failure to meet the requirements could result in penalties, particularly where there are persistent or deliberate reporting failures.
“The consequences go beyond penalties. Incorrect or late information could affect the amount of tax collected from employees, resulting in underpayments or overpayments. That generates more payroll queries and administrative work and where employees see unexpected changes to their take-home pay, it can quickly lead to dissatisfaction.”
Ed recommends that employers use the coming months to review which benefits they provide and identify those falling into the first phase. They should also speak to their payroll software provider about its readiness for April 2027 and make sure everyone who supplies benefit data knows what will be needed and when.
Businesses wanting to payroll other benefits voluntarily in 2027/28 will need to register with HMRC before the new tax year begins.
