In 2024, HMRC announced the mandatory payrolling of benefits in kind (BiKs) for most benefits, ensuring the benefits are taxed in real time through PAYE rather than via the submission of P11Ds. Originally, the deadline for mandatory transition was set as April 2026; however, as of a technical announcement from HMRC on 28th April 2025, the deadline has been pushed back to April 2027, with voluntary registration available until the start of the 2026/27 tax year.
For organisations offering a large range of benefits to employees, from company cars to private medical insurance, moving away from P11Ds should prevent the annual rush to compile and file information in time to accurately process tax and Class 1A National Insurance contributions for employees. This transition does, however, provide an opportunity for inaccurate BiK contribution calculations and confusion amongst employees on the impact it will have on their taxable salary.
This guide provides a checklist and a guide on how to prepare your organisation for the transition, ready for April 2027. If you require any support preparing benefit in kind calculations, categorising BiKs ready for adding to payroll, or simply wish to outsource payroll benefits and increase your efficiency, speak to MSP Payroll and we will be happy to help.
What are the requirements for payrolling benefits in kind?
From April 2027, almost all benefits in kind will be submitted alongside standard payroll and pension information in the Full Payment Submission (FPS) each month when payroll has been run. This means that, compared to previous P11D-based processes, BiKs will be taxed every month in real time.
Once the transition has been completed and the usual teething troubles ironed out, the time saved and the increase in accuracy should have a positive effect on payroll and HR teams. Often, employees with company cars would see regular changes in their tax code or tax bills to compensate for underpayments as a result of the Form P11D impacting their overall taxable salary. With this real-time transition, employees should also see a reduction in tax shocks or overpayments.
HMRC have stated that they will require an in-depth report covering all of the taxable benefits each employee receives, their value and when they started and ended (if it has). This initial reporting measure will place an additional temporary burden on payroll/HR resources, which should be factored into any transition planning heading towards 2027.
How will the tax contribution for each BiK be calculated?
HMRC have provided an overall, general calculation to cover most benefits in kind:
- Payroll and HR teams will be required to know the annual cash equivalent of the benefit for each employee.
- They should then divide that value by the relevant pay periods for each employee, whether that is monthly or weekly.
- The calculated monthly cash equivalent is then subject to income tax and Class 1A NICs as if it were added to the employee’s gross salary.
Where the value of a BiK is not known, HMRC have requested a reasonable estimate. This means all BiKs should have a cash equivalent value of some type, but opens HR and Payroll teams up to debate and disgruntlement from employees. Appropriate policies and fair valuation techniques must be in place before transitioning to the new system. Communication between departments, line managers and affected employees must also be clear and robust before completing the transition.
MSP Payroll can provide detailed support and guidance for all areas of tax contribution, please contact us here to find out how.
Which benefits in kind will be processed through payroll?
The following common benefits in kind have been earmarked for moving to payroll away from P11Ds (for a full list visit the HMRC addendum to their announcement on payrolling benefits in kind):
- Vans, cars and property
- Season tickets
- Vouchers or prepaid cards (outside of trivial benefits)
- Relocation expenses
- Mileage allowances
- PMI and other medical benefits
- Corporate hospitality, travelling and entertainment
Full clarification will be required from HMRC in the run-up to April 2027 on how these values should be calculated, especially regarding employee travel expenses and mileage etc. Employers should also start planning their communications to employees on this change as soon as detail is released, to avoid confusion and unnecessary upset when payslips are issued for the first time in April 2027.
Which benefits in kind are excluded from the changes?
Employers can voluntarily process living accommodations and loans through payroll, but HMRC have stated that at this moment in time, these benefits won’t be mandatory through payroll after April 2027 and can still be processed by P11D forms. The calculation for repayment of student loans will also not change.
What steps are required to transition successfully to payrolling benefits in kind?
Payroll teams will need to think about the following before completing the transition to payrolling benefits in kind in 2027:
Calculating the taxable value of benefits in kind
As HMRC has requested that all benefits be assigned an alternative cash value for tax purposes, HR and Payroll teams will need to coordinate with line managers and senior leaders to build a register of all benefits offered to employees across the business. This will include any benefits offered to staff outside of their role profiles, common in departments such as marketing, where ad-hoc benefits are offered as part of the recruiting process. Once all benefits have been collated, then a sensible cash value should be attributed for each, where the sum is the value if the employee purchased this separately outside of the business.
This is an area that often causes friction with employees, as for capital purchases such as cars, the “sticker price” is often much higher than the employee would have actually paid, and therefore the tax paid on that benefit will also feel penalising. Care must be taken that the calculation is robust to scrutiny or audit, while still representing real-world value or depreciation over time. Simple benefits such as PMI should be a straightforward calculation; complexities will arise with living costs, tax on mileage or fuel allowances.
Each employee benefit should be calculated individually and then split evenly across the employee’s pay periods, this will be their new monthly value for working out tax and NI deductions. If teams know of any estimated changes that will occur in the year, for instance, seasonal peaks and troughs for mileage or travel, or changes in company car policies, these should be included in the overall monthly value before submitting to HMRC.
HMRC have issued a moratorium on penalties and interest related to payrolling BiK in the 2027-2028 tax year, to ensure businesses have time to smoothly transition to the new process.
Once calculations have been completed and values agreed, they will need to be submitted to HMRC against each employee.
MSP Payroll can support your teams when calculating benefits ready for the transition. Please speak to us here to find out more.
Training and employee communications
Line Managers, HR and Payroll teams will require training before the transition around the mandatory changes, what impact this will have on the organisation and its employees and how to deal with questions, complaints and challenges from the affected workforce. The financial impact for each employee will also need to be included in training, as each employee may see changes in their monthly or weekly tax that may result in financial struggle.
Once training has been completed, employees will require notice and clear communication in good time before the mandatory transition. Employees should be provided with easy access to subject matter experts who can provide first-line support rather than being pushed towards frustratingly slow channels, such as HMRC directly.
The impact of cash flow for employees in their first year of BiK
If an employee currently receives benefits in kind and pays tax based on a P11D calculation, then they will be paying tax in arrears on benefits enjoyed in the previous tax year. The impact of the transition to real-time deductions may be that employees are seeing reductions in their gross pay for two years of BiK submissions at once.
HMRC have addressed this in their technical notice and has stated that where this causes an employee financial difficulty, then they can apply to HMRC to spread the underpayment across more than one year. Once this backlog has been removed (depending on the period of time taken to pay it off), an employee’s salary will return to a real-time value of tax. This may cause distress or anxiety for some employees and should be taken into consideration during communication and benefit calculations.
The 50% Overriding Limit
Employers will not be able to deduct more than 50% of an employee’s salary in tax. This may become relevant when transitioning to BiK payroll for senior business leaders who receive a number of different benefits. If employees meet this threshold, then after April 2027, payroll teams should carry forward taxable amounts to future pay periods in that tax year. This will then be collected through self-assessment or via the end-of-year reconciliation.
Businesses will need to be aware, at the point of assigning value to benefits, which employees are at risk of reaching the overriding limit, and then work with the employee to ensure they understand the implications, as they may wish to leave the benefit to avoid penalising tax costs.
Payroll systems and payslips
Teams responsible for payroll will need to check with their payroll software provider that there is already a plan, or service in place, to transition to adding benefits in kind to period tax calculations.
For payslips, HMRC has set mandatory information requirements, including relevant BiKs already received in a tax year and a statement from employers detailing the benefits included and their value at the end of the tax year. If employees benefit from a company-paid fuel card, then they will also require their taxable value reported to them in each pay period.
It may be more efficient, accurate and cost-effective to outsource your Payroll to MSP Payroll. We are ready for the transition and can provide a wide range of services. Contact us here to find out more.
The transition timeline for payrolling benefits in kind
The HMRC timeline states that information will be provided to payroll software developers in December 2025, consultation will be concluded and published in July 2026, voluntary registration for payrolling loads and accommodation will be live from November 2026, and Mandating Payrolling will be live from April 2027.
Voluntary registration for payrolling benefits in kind
Organisations can voluntarily register for payrolling BiK until 5th April 2026; after this point, employers will need to wait until the mandatory switch in April 2027.
Mandatory transition to payrolling for BiK
Employers will not need to register for the mandatory transition to the new process; this will be done automatically by HMRC. This will begin with the removal of benefits from employee tax codes during 2026 in preparation for April 2027.
How can MSP Payroll support your business?
MSP Payroll provide expert Payroll Services, including a comprehensive approach to statutory payments for parents.
Our services cover:
- Ongoing payroll services such as director tax and NI calculations
- Service and support for specific payroll issues or challenges
- Correct deductions from statutory payments such as tax, NIC, pensions, etc.
- Ad hoc payroll on-demand, including daily administration
- Pension advice and payroll compliance
We provide seamless Payroll services for your organisation, increasing employee satisfaction while reducing the impact on internal resources and the cost of inaccuracies.
Speak to us today to find out more.
Payrolling benefits in kind: Frequently asked questions
Are P11Ds being scrapped?
Under voluntary payrolling of BiK, P11Ds can still be used where employees are likely to exceed the overriding limit on taxable income. After April 2027, P11Ds will no longer be required for most benefits, with the exception of annual loans and accommodation. In this case, employers can opt to process P11Ds for these benefits until HMRC moves this to mandatory payrolling as well (likely to be 2028).
How will payrolling benefits in kind affect company car tax reporting?
From April 2027, all company car benefits will be required to be calculated and deducted in real time during that pay period. As detailed above, this means assigning a cash value equivalent to the benefit and including it in the employee’s tax profile. Employers will need to ascertain how depreciation will affect the value of the benefit over time and adjust accordingly.
Where can I register for voluntary payrolling of benefits in kind?
Voluntary payrolling can be registered through the HMRC tax portal until April 2026, when the voluntary scheme will close in preparation for the mandatory transition in April 2027.
MSP Payroll can help with all aspects of Payroll services. Contact us here to find out more