Payrolling benefits in kind changes: How to prepare early for HMRC changes

If you’re looking for answers to common questions about payrolling benefits in kind, check our our payrolling benefits in kind FAQs.

HMRC’s April update on payrolling benefits in kind changes

In April, HMRC released a technical note that added more detail to the upcoming payrolling changes. It expanded the scope, refined operational rules and clarified communication and compliance requirements.

Now that this year’s P11Ds have been filed and pay as your earn settlement agreements are being agreed, it’s a good time to look at what we now know so far – or at least what we expect.

While you’re thinking about payrolling, here are a few things you might want to keep in mind:

Voluntary payrolling benefits in kind

Although payrolling of benefits in kind won’t become mandatory until April 2027, employers can voluntarily adopt payrolling benefits in kind (PBIKs) from the 2026/27 tax year. While it might be temping to delay, we reccommend implementing the changes sooner rather than later.

Starting early in 2026/27 gives you time to:

Embed any changes smoothly
Test systems
Avoid the pressures of last-minute compliance.

In short, tackling the transition early could save you from bigger disruptions later.

Expanded scope of payrolling benefits in kind: What benefits must be payrolled

Employers should get ready for a wider range of items to be payrolled along with updated reporting rules:

Taxable employment expenses

Mileage payments that go beyond HMRC’s approved rates—and other taxable expenses beyond Benefits in Kind (BiKs) —must now be payrolled. These entries flow through your regular real time information full payment submission alongside standard BiK reporting

Voluntary payrolling exceptions

Some benefits remain outside the scope of mandatory payrolling until April 2027. These include employer-provided accommodation and beneficial loans. You can choose to payroll these items voluntarily. HMRC will keep them under review for potential future inclusion

Third-party benefits and reward schemes

Complex benefits delivered via external vendors or tax-award schemes are still under review. Further guidance from HMRC is expected later in 2025.

50% regulatory limit

As payrolling will be mandatory from April 2027, employers will be required to carry forward amounts into future pay periods for that tax year. Any uncollected amounts in excess of the 50% limit will be collected by HMRC after the end of the tax year. This will be done via the existing end-of-year reconciliation (P800) process or simple assessment. Where an employee is already registered for self assessment, uncollected amounts of tax will be collected via the self assessment process.

Employees and directors who receive no income

If an employee or director does not receive income from their employment or directorship, their employer will be required to send details of the BIKs and expenses provided using an FPS. They will also be required to pay the Class 1A NICs due in the same way that applies for employees who receive income. The FPS will need to show no payments of earnings and tax as none were provided. Any uncollected amounts of tax will follow the same P800 procedure as above.

Operational changes in payrolling benefits in kind

HMRC has introduced several key changes to how national insurance and benefit values are handled under the new payrolling rules:

Real-time Class 1A NICs
Now calculated monthly (instead of annually) aligned with your FPS cycle. You’ll still file a P11D(b) for record-keeping, but end-of-year reconciliation becomes simpler
Benefit valuation rules
Use the annual cash equivalent (including VAT) and apportion it evenly across pay periods (it might not always be 12 months). If the benefit’s value changes mid-year, recalculate the remaining amounts. When values are unknown at the start of the year, apply a reasonable estimate. HMRC recognise that there may be situations where it is not known until some time after the tax year has started that an employee has received a BiK. In these cases, the BiK can be reported as soon as possible in the remaining pay periods for that tax year. Earlier submissions do not need to be amended as long as the BiK is reported across the remainder of the relevant tax year.
Using estimates
HMRC have confirmed there will be an update process for BiKs and expenses where the IT and Class 1A NIC could not be determined during the year. The BiKs update process can be used to record any under- or over-payments of tax. Where this process is used, all BiKs must be reported by 6 July following the end of the tax year. The additional tax due or repayable will be taken into account in the end-of-year reconciliation process (P800), simple assessment and self assessment HMRC might accept the spreading out of any underpayments across more than one tax year). Any additional Class 1A NICs due will be payable by 22 July following the end of the tax year.

Communicating payrolled benefits in kind to employees

Clear notification and registration steps are essential:

Employee notification You must inform employees in writing which benefits are being payrolled and how their tax codes and net pay will change. HMRC will remove payrolled benefits in kind from tax codes automatically to prevent double taxation.
Registration requirements From April 2027, most BiKs will be covered automatically—no registration needed. If you decide to payroll accommodation or loans before they become mandatory, you’ll still need to register those items.

Penalties and compliance

Transitional relief eases the first year of implementation:

Penalty relief for 2027–28 HMRC will not levy penalties for BiK reporting inaccuracies unless there’s deliberate non-compliance. Standard late-filing and payment penalties still apply, and interest will accrue on late payments.

What’s next for payrolling ofbenefits in kind?

With mandatory payrolling of benefits in kind (BiKs) coming into force from April 2027, the months ahead offer a valuable window to prepare, test and refine your approach. HMRC is expected to publish draft legislation and guidance for consultation in the autumn.

Action steps for employers, agents and software providers

Review your payroll systems
Assess whether your current setup can handle monthly Class 1A NICs and expanded BiK reporting.
Update payroll software
Work with your provider to ensure your system is ready for real-time Class 1A NICs and flexible benefit valuation rules.
Draft clear employee communications
Prepare messaging to explain how payrolling will affect employees, especially around benefit visibility and tax deductions.
Plan for voluntary payrolling (2026/27)
Consider registering for voluntary payrolling ahead of the mandate to test systems and ease into the new process.

Get in touch today to make sure you’re ready for what’s coming