From April 2026, employers will be required to report most BIKs through PAYE, reporting both income tax and Class 1A National Insurance Contributions (NICs) in real-time.
The change, which is expected to affect up to 4 million employees, has been introduced with the aim of simplifying and modernising the tax system, as well as easing the pressure on HMRC services following the year-end. Employers, however, will need to prepare ahead of implementation to ensure they understand their obligations and are ready for the upcoming changes.
The current position
To incentivise employees, employers may provide non-cash benefits to employees in addition to their normal wages. Common examples include the provision of company cars and fuel payments, company provided living accommodation and health insurance. These are often referred to as benefits in kind.
The taxable amount of a benefit is its ‘cash equivalent’ and this is calculated in accordance with tax legislation.
Currently, employers can report taxable BIK information in two ways:
a. Form P11D
b. Via payroll reporting (on a voluntarily basis)
Form P11D and P11D(b) are completed after the tax year in which a BIK is provided by an employer. These forms must be submitted by 6 July following the end of the tax year, with the employer paying the associated Class 1A National Insurance Contributions to HMRC by 19 July (or 22 July if paying electronically).
Once the cash equivalent has been calculated and reported using the form P11D, the benefits are included on the employee’s personal tax return so they can pay the income tax liability on the benefit. If the employee does not complete tax returns, the tax is collected through their tax code.
Alternatively, employers can choose to report certain non-cash benefits via the payroll (excluding employment related loans and accommodation). This is completely voluntary, and the employer can choose which benefits to include in the payroll. Employers must register with HMRC that they wish to payroll benefits before the start of the tax year.
When payrolling benefits, the cash equivalent of the benefit is split across the number of relevant pay periods for each employee, with the amount being added to the employee’s salary each pay period and subject to income tax. This allows tax to be collected while the employee is enjoying the benefit, rather than HMRC collecting tax in arrears after the tax year.
Mandatory payrolling of BIKs
The mandating of payrolling of BIK from April 2026 will operate on a similar basis to that currently rolled out through voluntary payrolling of benefits.
The main changes to note follows:
Under the new rules, payrolled benefits will need to be included on the Full Payment Submission (FPS) and reported under Real Time Information (RTI). With exceptions (see below), the taxable BIK will no longer be able to be reported on a form P11d.
Employment related loans and accommodations can now be included within the payroll reporting. However, HMRC has recognised that calculating the cash equivalent of these benefits can be burdensome and reporting the benefits on payroll will be voluntary. Reporting the benefit on a form P11d will remain available for those who do not wish to payroll these.
An end of year process will be introduced to amend taxable values of any BIKs. However, HMRC will expect the taxable values to be reported as accurately as possible during the tax year.
HMRC have confirmed they will monitor the penalty position for the first year (2026/27), whilst employers get used to the new process of reporting BIK to HMRC through payroll, recognising there will inevitably be a “period of adjustment” in the first year.
How might it affect us?
HMRC are yet to publish draft legislation and technical guidance, and further details are expected later this year.
Although these changes aim to reduce employers’ compliance burden by reducing the number of forms required to be filed with HMRC each year, the substantial changes coupled with the short timeframe may pose potential issues for employers during the early stages of implementation.
Ahead of the changes, here are some areas to think about and how the changes may affect you:
Given that 6 April 2026 is not far away, this does not leave much time for software development and testing before implementation.
There will likely be changes to the FPS in order to report the benefit, however, there is currently no guidance on what information is required to be reported and kept on record. For example, P46(Car) are required when there are changes to do with company cars.
Employer’s will be required to calculate the cash equivalent and include this on the FPS. This adds an extra layer that could heighten the risk of errors. Additional training will be necessary for payroll processors or collaboration with those who previously completed the forms P11D and P11D(b), to accurately calculate the BIK values.
As income tax will be processed through payroll, the employee’s PAYE liability increases. Communicating with employees will be essential to explain the changes and how it impacts their payslip.
HMRC has yet to determine the method of how living accommodation and employment related loans will be calculated and processed in-year.
While the mandatory payrolling of BIKs aims to streamline the process and ensure timely tax collection, it also brings new challenges and adjustments for all parties involved. As we approach the implementation date of 6 April 2026, it is crucial for employers to stay informed and prepared ahead of time, ensuring that their systems and processes are ready to handle the new requirements.
We recommend you consult with your accountant, tax adviser or payroll provider to ensure you fully understand the new rules and how they apply to you.