What do you need to know?
The Payrolling Benefits in Kind (PBIK) scheme was introduced by the UK Government in 2016. It allows employers to process employees’ benefits through payroll rather than reporting them separately on a P11D.
A Benefit in Kind (BIK) refers to non-cash benefits employees receive from their employer, such as a company car or private medical insurance. These are often referred to as “perks” and are taxable.
The aim of payrolling benefits is to simplify how tax on benefits is reported and collected. Instead of submitting P11D forms at year end, the taxable value of benefits is included in employees’ pay throughout the year, ensuring tax is deducted in real time.
HMRC Announces Phased Introduction of Mandatory Payrolling
HM Revenue & Customs (HMRC) has updated its interim guidance for mandatory payrolling of Benefits in Kind (BIKs) and expenses.
While mandatory payrolling will still begin from 6 April 2027, HMRC has confirmed that implementation will now be introduced on a phased basis, providing employers, payroll providers and software developers with additional time to prepare for the changes.
HMRC have confirmed that mandatory real-time reporting of Income Tax and Class 1A National Insurance contributions for certain benefits in kind (BiKs) and taxable expenses will now be phased in. Phase 1 will commence from 6 April 2027 and phase 2 will commence from 6 April 2028. This will support a smoother transition for businesses.
From 6 April, mandatory payrolling of BiKs will be phased in as part of phase 1 for:
- company cars
- car fuel
- vans
- van fuel
- employer-provided medical benefits
This revised approach recognises the scale of the changes required and aims to support a smoother transition away from the traditional P11D reporting process.
What does this mean for Employers?
The move to mandatory payrolling remains one of the most significant changes to payroll reporting in recent years.
The phased introduction is designed to:
- Reduce the administrative burden on employers and HMRC
- Improve accuracy by taxing benefits in real time
- Simplify the reporting and payment of tax on employee benefits
- Allow employers additional time to review and adapt their processes
- Support software providers in implementing the necessary system changes
Although the implementation has been phased, employers should not delay preparations.
Preparing for the transition
The 2026/27 tax year will remain an important preparation period for employers. Businesses should use this time to review their current benefits processes and ensure they are ready for the changes as they are introduced.
Preparation Checklist
- Review all current benefits provided to employees
- Identify which benefits are currently payrolled and which remain subject to P11D reporting
- Monitor HMRC announcements regarding the phased implementation timetable
- Ensure payroll software is capable of supporting payrolled benefits
- Engage with your payroll provider to confirm readiness
- Update internal processes and controls for benefit reporting
- Review employee communication plans
Employee Communication Points
Employers should begin communicating with employees ahead of any changes.
Key messages include:
- What payrolling benefits means and how it works
- Tax will be collected in real time through payroll
- The changes should not increase the amount of tax due, only the timing of collection
- Payslips may change as benefits begin to be processed through payroll
- Employees may see changes to their tax codes as benefits are removed from coding adjustments
Impact on Tax Codes
Under the current P11D system, HMRC typically adjusts employees’ tax codes to collect tax on benefits.
Under payrolling:
- Tax on benefits is collected directly through payroll each pay period
- HMRC will no longer need to adjust tax codes for most payrolled benefits
- Employees may notice tax code changes as benefits are removed from coding adjustments
- Tax codes may become simpler and easier for employees to understand
Transitioning Away from P11D
As mandatory payrolling is introduced, employers should review how benefits are currently reported.
Key Steps:
- Understand which benefits will be included in each phase of implementation
- Begin payrolling benefits where appropriate
- Stop reporting those benefits on P11Ds once they are payrolled
- Continue submitting P11Ds for any benefits that remain outside the mandatory payrolling regime (where applicable)
- Review year-end processes to align with the new requirements
How can Menzies help?
If you would like support preparing for mandatory payrolling of benefits in kind our team is here to help.
Our Payroll Bureau can manage your company’s payroll in-line with HMRC compliance, alleviating this responsibility from employers, and freeing up time to focus on your business.
Get in touch to discuss how we can support your transition, ensure compliance, and streamline your payroll processes.
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