In early 2024, HMRC announced a significant change to the way employers report and pay tax on benefits-in-kind (BIKs) provided to their employees. This change, set to take effect from April 2026, marks the end of the long-standing P11D form system and introduces mandatory payrolling of BIKs.

What are Benefits-in-Kind?

Benefits-in-kind are non-cash beneitfs that employers provide to their employees. These can include company cars, private medical insurance, gym memberships, and many other perks. Currently, these benefits are reported annually on a P11D form, and the tax is usually collected by adjusting the employee’s tax code.

The Current System

Employers have used Form P11D to report BIKs to HMRC for the past 50 years. The form summarises the taxable value of benefits for each employee. The P11D(b) form acts as a cover sheet, summarising all P11Ds and calculating the employer’s Class 1A National Insurance contributions (NICs) liability. Forms must be submitted by 6 July with a grace period until 19 July before penalties apply. However, the retrospective system can lead to significant delays between employees receiving benefits and paying taxes on them, resulting in unexpected tax bills.

The Move to Mandatory Payrolling

Since 2016, employers have had the option to payroll BIKs instead of using P11Ds. This means including the value of benefits in an employee’s regular pay and deducting tax through PAYE. From April 2026, this will become mandatory for all employers.

Key Changes:

1. P11D forms will be scrapped entirely.
2. Class 1A NICs will be collected through payroll rather than as an annual lump sum.
3. All types of BIKs will need to be included in the payroll, including those currently excluded from optional payrolling (like beneficial loans and living accommodation).
4. Employers will need to monitor and report BIKs in real-time throughout the year.

What This Means for Employers

The shift to mandatory payrolling represents a significant change for employers:

1. Increased Administrative Burden: Employers will need to track and report BIKs much more frequently, potentially with every pay cycle rather than annually.
2. Cash Flow Impact: While the overall tax liability won’t change, the timing will. Employers will pay Class 1A NICs throughout the year instead of in one lump sum.
3. System Updates: Payroll systems will need to be updated to handle the new reporting requirements and NIC calculations.
4. Real-Time Monitoring: Companies will need to monitor BIKs as they are provided rather than compiling the information at the end of the tax year.

What This Means for Employees

For employees, the change could bring both benefits and challenges:

• No Surprise Tax Bills: As tax on benefits will be deducted throughout the year, employees should avoid unexpected large tax bills.
• Improved Accuracy: Real-time reporting should mean that tax codes are more up-to-date and accurate.
• Potential Cash Flow Impact: Employees will pay tax on their benefits sooner, which could affect their take-home pay.

Potential Challenges

While HMRC presents this change as a simplification, it may create new complexities:

• Increased Workload for Employers: The shift from an annual task to ongoing reporting could significantly increase the workload for payroll teams, especially in companies with complex benefit structures.
• Adjustments and Corrections: If benefits change mid-year or errors are discovered after the tax year ends, making corrections could be more complex under the new system.
• Cash Flow Management: Both employers and employees will need to adapt to the new timing of tax payments on benefits.

Preparing for the Change

With the change set to take effect in April 2026, employers have time to prepare:

• Review Current Benefits: Review all the benefits you currently offer and how they’re reported.
• Update Systems: Work with your payroll software provider to ensure your systems will be ready for the new requirements.
• Train Staff: Ensure your payroll and HR teams understand the new requirements and processes.
• Communicate with Employees: Help your staff understand how this change might affect their pay and tax.
• Plan for Cash Flow Changes: Consider how the new timing of NICs payments might affect your company’s cash flow.

The move to mandatory payrolling of benefits-in-kind represents a significant shift in how employee benefits are taxed and reported in the UK. While it promises to streamline processes for HMRC and provide more up-to-date tax information for employees, it also brings new challenges, particularly for employers. It’s crucial for employers to stay informed about any further guidance from HMRC and to start preparing their systems and teams for this significant change.