Payrolling benefits in kind (BIKs)

What can you do to prepare?

A reminder of what’s changing

HMRC has confirmed a phased approach to the mandatory payrolling of benefits in kind, following feedback from employers, payroll professionals and software developers. Rather than moving almost all benefits into the payroll from April 2027 in a single step, the change will now happen in two phases.

Phase 1 starts on 6 April 2027 and covers a defined group of common benefits. Phase 2 is expected to follow from 6 April 2028 and bring most remaining benefits into scope. This gives employers more time to prepare, but April 2027 remains a real go-live date for anyone providing the phase 1 benefits.

From phase 1, employers will process the relevant benefit values through the payroll in real time, reporting Income Tax and the associated Class 1A NIC as they go. For any employer that provides benefits in kind, this fundamentally alters how you report, pay for, track and manage employee benefits. Without adequate preparation, it leaves lots of room for error.

Which benefits are included from April 2027?

HMRC has now confirmed that phase 1 of mandatory payrolling applies the following benefits:

Company cars
Company car fuel for private use
Employer provided vans
Van fuel benefits
Employer funded private medical insurance and healthcare benefits

These benefits must be reported through the payroll rather than the annual P11D process., and the income Tax and the applicable Class 1A NIC on them must be paid in real time.

Other benefits will continue to follow existing reporting arrangements during the transition. You can still report them on a Form P11D, or payroll them voluntarily if you register in advance. HMRC expects to bring most remaining benefits into mandatory payrolling from April 2028, subject to further guidance and technical readiness.

Beneficial loans and employer-provided accommodation are expected to stay outside the mandatory regime for the time being. These can still be reported via Form P11D or payrolled voluntarily.

The phase 1 scope covers the benefits most employers provide, so for many businesses it will account for the bulk of their reporting. The benefits left until later phases tend to be the more complex ones, which should make the initial transition more manageable.

What can you do to prepare?

These changes represent a significant shift for employers and employees. Do not underestimate how complex they are, how many parts of your organisation they might affect, and just how long they will take to embed.

You will need to report even more data than is currently required (even if you are already payrolling benefits), to provide a full breakdown of the benefits being reported through the payroll, and to reflect the Class 1A NIC being payrolled.

In order to get prepared, you should:

1. Make sure you have all the correct benefit information from within your business and from benefit providers.

2. Have systems in place for calculating benefit in kind values which are to be processed in the payroll for each of your pay periods, including adjustments for starters, leavers and benefit cost changes.

3. Communicate the impact of the changes to your employees. The tax adjustment for benefits has always been delayed to the following tax year, after the submission of form P11d. From April 2027, employees with phase 1 benefits will see changes to their tax codes and payslips, and they will be paying tax on benefits in real time.

In addition, if errors are made, the correction must be processed over the remaining months of the tax year, which could further impact on their net pay.
Furthermore, if your employees have underpayments of benefits from an earlier year, they will be taxed twice; in real time for the 2027/28 benefit and for the unpaid tax on earlier year benefit adjustments.

4. Ensure that your 2027/28 forecasts include the financial impact of paying Class 1A NIC for both 2026/27 and 2027/28 in the same year.

5. Establish an end of year process if you do not know the value of taxable benefits in kind during the year. We are expecting HMRC to introduce a ‘month 13’ to allow employers to correct some benefits which they previously had to estimate.

6. We would advise your employees to set up their Personal Tax Account (PTA) with HMRC, if not done already. They will be able to access all their tax information, including the benefits in their PTA, and liaise with HMRC before and after April 2027.

In terms of penalties. HMRC have said that there will be a light touch approach in 2027/28, unless the errors are deliberate. From 2028/29 onwards, the penalty regime will be in force.

Because phase 2 benefits stay outside mandatory payrolling during 2027/28, many employers will run parallel reporting for a period. That means real-time payroll for phase 1 benefits and P11D for the rest; planning for both is crucial.

Penalties

HMRC has said it will take a light touch approach to penalties in 2027/28, unless errors are deliberate. From 2028/29, the penalty regime will be in force.

HMRC timetable

The guidance is still developing. HMRC confirmed the phased approach in June 2026, and further technical detail is expected through the second half of 2026. This does not leave much time for software to be updated, tested and rolled out.

Their current timetable is as follows.

Action	Date
Phased approach to mandatory payrolling confirmed	June 2026
Updated legislation and guidance published	July 2026
Primary and secondary legislation to be laid before parliament	In line with 2026 Finance Bill timings
RTI technical specifications to be published	Second half of 2026
Voluntary registering for the payrolling of loans and accommodation in April 2027 to 2028 to go live	November 2026
Voluntary registering for the payrolling of loans and accommodation in April 2027 to 2028 to close	5 April 2027
Phase 1 mandatory payrolling goes live	6 April 2027
Phase 2 mandatory payrolling expected	6 April 2028

We can help

Payrolling benefits in kind will affect how you report, budget for and explain employee benefits. The earlier you review your benefits, systems and forecasts, the smoother the transition. Contact us today to find out more about how we can help you prepare.

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We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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