Employee benefits – tax compliance is changing

Benefits-in-kind (BIKs), such as company cars or gym memberships, are often used as a means of remunerating employees and directors. Unless an exemption applies (e.g. employer pension contributions), the benefit will be reported on a P11D form, the recipient will be subject to Income Tax (often via an adjustment to their tax code) and Class 1A National Insurance Contributions (NICs) will be payable by the employer. The current rate of Class 1A NICs is 15% of the taxable value of the benefit.

Several years ago, HMRC introduced the option for employers to ‘payroll’ most BIKs. This effectively involves adding an amount of deemed income to the person’s salary each pay period to represent the benefit received. The benefit does not then appear on a P11D, although it is still subject to Class 1A NICs.

HMRC originally announced that payrolling would become mandatory for nearly all benefits from 6 April 2026, although this subsequently got put back to 6 April 2027. In June this year, this timetable was further relaxed: only company car, van, fuel and medical BIKs will be subject to mandatory payrolling from April 2027, with voluntary payrolling still available for other benefits, most of which are now expected to come within the scope of mandatory payrolling from April 2028.

Mandatory payrolling represents a major change for any business that has employees, as well as for the employees themselves. In the following paragraphs, we explain some of the key aspects and problem areas.

Overview
The reporting process for payrolled benefits is via Real-Time Information (RTI). The Full Payment Submission (FPS) shows the payroll information plus details of:

• taxable employment expenses and BIK details; and
• the PAYE tax and Class 1A NIC due.

Employees will pay IT and employers will pay Class 1A NICs each payday on the benefits and expenses.

The number of fields for reporting benefits and taxable employment expenses on the FPS will be increased, to align with existing P11D information. This will allow HMRC to:

• see the benefits on the FPS; and
• ensure the right amount of tax is being reported and paid.

As mentioned above, only company car, van, fuel and medical BIKs will be subject to mandatory payrolling from 6 April 2027.

Most other benefits will be mandated from April 2028, but payrolling of employment-related loans and employer-provided accommodation BIKs will remain voluntary until further notice (as they can be difficult to value within the tax year).

Preparing for mandatory payrolling
Employers will no longer need to register to payroll company car, van, fuel and medical BIKs from April 2027, as it will be automatic. However, registration will still be needed to voluntarily payroll other benefits. The online service to register to payroll these other benefits is expected to go live in November 2026.

Advising employees
During the 2026/27 tax year, employers should meet with employees to share information about the changes and how they will affect them in 2027/28 and later years.
Employees should understand how their tax codes and net pay will be affected, so they can plan for the change and the effect on their net pay.

If they currently have a deduction in their tax code for an estimated benefit that is now going to be payrolled, there will be no such deduction from 6 April 2027. However, arrears of tax to pay on 2026/27 and/or prior years’ P11D benefits will still be collected from April 2027 via PAYE, unless they agree to pay HMRC directly.

Without adequate prior information being provided to employees, employers may well find themselves inundated with staff queries, once the first payroll run including payrolled benefits is made, due to changes in net pay and payslips that will result.

Review benefits provided
Employers should make a list of benefits provided to employees that are currently reported to HMRC on the Form P11D, to identify what benefit data needs to be, or might voluntarily be, payrolled. They should consider how often that data is received from the providers and whether this would allow the employer to file the FPS on or before the payment date. Will data (and changes therein) be provided by the benefit providers on a timely enough basis?

Cashflow issues
Currently, Class 1A NICs is payable annually in arrears, by 31 July following the tax year. With payrolled benefits, the Class 1A has to be paid via PAYE for every payment period (e.g. monthly or weekly). Will there be cashflow implications for employers when paying Class 1A NICs monthly rather than by 31 July after the tax year?

For the first year (2027/28), on payrolled benefits, the employer will be paying:

• 2027/28 Class 1A NICs monthly; plus
• the Class 1A NICs due from 2026/27, by 31 July 2027.

There is therefore an overlap of Class 1A NICs payments in 2027/28.

Penalties
To support the introduction of the changes, employers who make errors in the mandatory payrolling of benefits in the 2027/28 tax year will not be charged penalties for inaccuracies (unless there is evidence of deliberate non-compliance). However, late filing and late payment penalties for RTI returns may apply where returns are not sent on time or payments are made late. Statutory interest will also be charged.

So, employers should get their returns in on time, even if they are not completely sure of their accuracy! Amended submissions can be made later.

Reporting the benefit in real time
The employer must calculate the ‘cash equivalent’ of the benefit i.e. the cost to the employer of providing that benefit (using normal BIK rules) less any contribution from the employee.
The cash equivalent figure is then divided by the number of pay periods in the tax year, typically fifty-two, thirteen or twelve. This gives the taxable benefit per payday, which is then added to the employee’s payroll records as a non-monetary gross pay element.

Should the value of the benefit change during the year, the employer must work out the revised taxable amount to be payrolled over the remaining pay periods in the tax year.
The benefit should be identified in the payroll software as:

• taxable; but
• not subject to employee NICs, student loan deduction nor pension contributions.

It will however (as discussed) be subject to Class 1A NICs each payday.

It must also be identified as a ‘payrolled benefit’ on the RTI submission. This enables the Department of Work and Pensions (DWP) to exclude the figure when reviewing the employee’s pay for state benefit purposes.

The benefit will appear as a new line on the employee’s pay slip under gross pay.

‘Making good’
If the employee intends to make good the benefit, the employer should payroll the cash equivalent, taking into account the sum the employee expects to make good. Where the making good does not happen, or is overpaid or underpaid, corrections can be made in subsequent pay periods. Employees have until 6 July after the end of the tax year to make good. Employers have until 22 July following the tax year to adjust taxable values of benefits.

The employer will be able to report this by revising the final FPS for the tax year.

Unknown value
If the BIK value is not known at the start of the tax year, an estimate of the taxable value can be used, but it must be “reasonable”. Once the value is known, an adjustment can be made later in the year.

HMRC expect the employer to:

• report the BIK, either when they become aware of it and its value or when they can estimate a value;
• take reasonable care when reporting the BIK if estimating taxable values; and
• report the benefit as close to the relevant pay period as possible, rather than waiting until the end of the year.

Record keeping requirements
HMRC will expect employers to:

• comply with current record keeping requirements; they may ask for evidence of how expenses and benefits have been accounted for at the end of the tax year;
• record the date and details of every expense or benefit provided;
• keep any information needed to work out the amount reported to HMRC;
• record any payments an employee contributes to an expense or benefit;
• keep any correspondence with HMRC;
• keep records for 3 years from the end of the year to which they relate.

Employees and directors with no income
In these cases, the employer will be required to:

• send details of payrolled benefits and expenses using an FPS; and
• pay Class 1A NICs due in the same way that applies for an employee with income.

The FPS will need to show no payment of earnings and tax. The uncollected tax will be collected:
• using the existing end of year reconciliation P800 process; or
• simple assessment; or
• via a tax return (if the employee is registered for self-assessment).

Employees who receive BIKs and expenses after leaving employment
These benefits (e.g. continued use of a company car or private medical insurance) should be reported on an FPS, with the employee having no earnings.

Any uncollected amounts of tax will be collected in the same way as for employees with no income.

As we said, there is much for businesses and employees to think about, including whether employers want to voluntarily payroll other benefits so as to avoid having to deal with two different systems in the same year.

Please get in touch with our team if you need help in understanding these changes.