Guide to payrolling benefits in kind for UK employers

Prior to April 2016, the only way to formally report company-provided benefits to HMRC, e.g. company-funded meals, medical insurance, service awards, and gifts, was to submit P11D forms at the end of the tax year.

Not only was this a fiddly and manual process, but it was also extremely time-consuming.

However, through changes that were introduced in April 2016, companies now have the option to voluntarily register to an initiative called ‘Payroll Benefits in Kind’ (PBiK) through HMRC’s online and service.

This new arrangement has enabled companies to simplify how employees are taxed, and the manner in which they report expenses and benefits to HMRC. 

Here we give you all the guidance to make sure your employee’s benefits in kind are properly reported.

What is the payrolling of benefits about?

Payrolling benefits in kind is the process that allows an employee to pay tax each pay period through the income they earn in the tax year that they received the benefit.

Previously, companies would have needed to fill out all of the information on a P11D form at the end of each tax year, meaning employees would actually pay the tax in the following year. HMRC would then collect the tax on benefits by reducing the employee’s personal allowance.

While currently voluntary for most benefits, payrolling will become mandatory for all UK employers from April 2027, following HMRC’s recent announcement of a 12-month implementation delay to allow for better preparation.

Why should you payroll benefits?

There are various reasons why you should payroll benefits, including:

• It removes the need for you to complete P11Ds on behalf of your employees. Not only does using PBIK save time, but it also reduces the chances of making any manual errors, unlike P11Ds.

• Employees pay the tax on the benefit during the tax year in which they receive it.

• You can plan which benefits you wish to process in this way.

• The benefit’s value is visible in the employees’ taxable gross figure on their payslip.

What are the important updates for the 2025/26 tax year?

Recent legislation has significantly changed how UK employers handle benefits in kind (BIKs). Currently, from April 2025, employers face a higher National Insurance contribution rate of 15% on benefits, while preparing for the mandatory payrolling of all benefits from April 2027.

While HMRC used to allow employers to informally payroll their benefits if they’d missed the April deadline, this is no longer the case. Informal arrangements are no longer allowed, and businesses must have registered for the PBiK initiative as of the start of the new tax year.

In addition to this, HMRC no longer allows businesses to submit P11D forms and mark benefits as ‘payrolled’ for the new tax year. This means you cannot use the P11D form to confirm or tidy up benefits that you have already processed through your payroll. You must strictly keep them separate.

How do you register for payrolling benefits in kind?

Companies that want to register for PBIK must do so before the start of the tax year. The registration is then ongoing, meaning that there’s no need to reapply each year. Although voluntary registration is still open, early adoption is recommended before the mandate kicks in.

They will also be required to inform HMRC, via its online service, about which benefits they wish to payroll, and whether they would like to exclude any specific employees from the PBiK scheme. They will still need to submit a P11D(b) form to report and pay Class 1A NIC due on the benefits.

Should a company ever wish to deregister, they can use the same online service.

However, it is worth noting that this must also be completed before the start of the tax year, and can’t be done halfway through.

What benefits can be payrolled?

For the 2025/26 tax year, the following published BIK rates apply:

• Electric vehicles: 3% BIK rate

• Company vans: £4,020 annual benefit charge

• Van fuel benefit: £769

• Car fuel benefit multiplier: £28,200

• Medical insurance: Full premium value

What do you need to know before payrolling benefits in kind?

• You can only register before the start of the tax year. Consequently, any benefits that are decided on, or after the deadline, can’t be administered in this way.

• To payroll benefits for the 2026/27 tax year, employers must have registered by 5 April 2026, though it is recommended registering 30 days before that, to ensure employee tax codes are updated before the first April payday. Employers should also ensure their payroll software is compatible with the requirements.

• Benefits such as employer-provided living accommodation and beneficial loans cannot be processed as a PBIK.

• Once you’ve successfully registered for payrolling benefits in kind, you must write to your employees to let them know what this means for them. At the end of each tax year, and before 1 June, you must write to your employees again to provide them with:

  • Details of the benefits you have payrolled

  • The cash equivalent of the benefit

  • Details of benefits you have not payrolled

  • Any benefits that have been payrolled as optional remuneration.

What tax do employees pay on benefits?

Let’s take a little detour and talk about tax on employee benefits. In the UK, your employees are expected to pay tax on some types of benefits. Don’t worry, though - you can make this easier on them by paying this on their behalf, deducting what they owe right from their pay checks through the Pay As You Earn System, or PAYE for short.

The treatment of this can be complicated and involve National Insurance (NI) considerations your business will need to be clued-up on. Most importantly, you’ll want to ensure that your payroll system is set up to deal with employee benefits tax properly.

Employees can expect to pay taxes on benefits like accommodation, loans, and cars. The amount they’ll need to pay will depend on the kind of benefit and its value, which you’ll work out for them as their employer.

Some benefits, such as childcare and canteen meals, are tax-free, similar to certain legitimate business expenses which may be exempt. However, most benefits will attract some level of tax. And you’ll pay both tax and National Insurance on any benefits paid in cash, which are treated as earnings.

How do you prepare for mandatory payrolling benefits?

Here are the steps for UK businesses to take to prepare for mandatory payrolling:

• Review and update payroll software capabilities to ensure accurate reporting

• Train payroll staff on new requirements to help ensure compliance

• Establish processes for benefit value calculations

• Set up clear communication channels with benefit providers

• Implement monthly benefit value tracking systems

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