How to prepare for mandatory payrolling of benefits in kind

In a significant move towards modernising tax processes, HM Revenue & Customs (HMRC) has announced that, from April 2026, the payrolling of benefits in kind (BIKs) will become mandatory for employers. This change aims to streamline the reporting and taxation of non-cash benefits provided to employees, such as company cars, private medical insurance, and personal bills.

Understanding the shift

Currently, many employers report BIKs annually using forms P11D and P11D(b). With the new mandate, employers will need to process these benefits through payroll in real-time, ensuring that the associated Income Tax and Class 1A National Insurance Contributions (NICs) are deducted as the benefits are provided.

This approach eliminates the need for annual P11D submissions, providing employees with clearer visibility of their taxable benefits on each payslip.

Exemptions and voluntary options

Initially, certain benefits are exempt from mandatory payrolling. However, employers have the option to voluntarily payroll these benefits if they choose. It's essential for businesses to assess which benefits they provide and determine the appropriate reporting method for each.

Preparing for the transition

To ensure a smooth transition to mandatory payrolling of BIKs, employers should consider the following steps:

1. Assess Current Benefits: Compile a comprehensive list of all BIKs offered to employees to understand which will need to be payrolled.
2. Update Payroll Systems: Ensure that your payroll software can handle real-time reporting of BIKs and is compliant with HMRC's requirements.
3. Train Relevant Staff: Educate HR and payroll teams about the upcoming changes to ensure accurate processing and reporting.
4. Communicate with Employees: Inform employees about how the changes will affect their payslips and tax deductions to prevent confusion.
5. Consider Early Adoption: Employers can opt to voluntarily payroll benefits starting from April 2025. Early adoption allows businesses to familiarise themselves with the process before it becomes mandatory. To do so, registration with HMRC must be completed by 5 April 2025 for the 2025/26 tax year.

Potential challenges

Transitioning to payrolling BIKs may present challenges, including:

• Data Management: Accurate and timely data collection is crucial to ensure correct tax deductions.
• System Integration: Aligning benefit providers with payroll systems to facilitate real-time reporting.
• Employee Impact: Employees may experience changes in their net pay due to the immediate taxation of benefits, necessitating clear communication to manage expectations.

How can we help

The move to mandatory payrolling of benefits in kind represents a significant shift in employer obligations and payroll processing. By preparing in advance and considering early adoption, businesses can navigate this transition effectively, ensuring compliance and maintaining employee trust.

Whether you need guidance on updating your payroll processes, understanding tax implications, or registering for early adoption, we can help ensure a smooth transition. Get in touch with our Director, Gail Swinburn (gailswinburn@lubbockfine.co.uk) to discuss your specific needs and how we can assist you in staying compliant and efficient.