Mandatory payrolling delayed to 2027 – Time to prepare, not to forget
The Government has confirmed that the mandatory payrolling of benefits in kind (BIK) and taxable employment expenses will now be introduced from April 2027, a year later than initially planned.
This extra time allows employers to address any gaps in how benefits are managed before mandatory payrolling begins.
How benefits in kind are currently reported
At present, you have the option to process BIK voluntarily through payroll for Income Tax purposes.
This must be done through advance registration with HM Revenue & Customs (HMRC), and not all benefits can currently be payrolled.
Where benefits are not payrolled, employers must submit P11D and P11D(b) forms after the end of the tax year to report the value of the BIK and calculate Class 1A National Insurance contributions (NICs).
Under voluntary arrangements, limited data is submitted to HMRC during the year, which means tax is often collected retrospectively through adjustments to employees’ tax codes.
How will payroll reporting be changing?
From April 2027, the payrolling of most BIK and taxable expenses will become mandatory.
Income Tax and Class 1A NICs will need to be calculated and reported through Real Time Information (RTI) using Full Payment Submissions (FPS), bringing the treatment of BIK in line with standard payroll reporting for earnings.
Employers will need to calculate the cash equivalent of each BIK, divide it by the number of relevant pay periods, and include that value within the payroll cycle.
These figures will be taxed in real-time and will also attract Class 1A NICs each period. Where the exact value is not yet known, a reasonable estimate must be used.
The new approach will give HMRC better oversight of payrolled benefits and reduce the need for manual compliance checks.
It also removes the need for year-end P11D reporting in most cases, although temporary exceptions will remain for employment-related loans and accommodation.
Real-time tax implications for employees
Employees may experience a short-term cash flow impact, particularly in the first year of the change.
In some cases, they may have tax deducted in real-time for current year BIK while also repaying tax from previous years via their tax code.
Employers will be encouraged to explain this clearly to staff, and HMRC has pledged to offer flexibility in how underpayments can be repaid.
There are also safeguards in place to ensure that employees are not overtaxed. The existing 50 per cent overriding regulatory limit remains, meaning that tax deductions in any pay period cannot exceed half of an employee’s cash earnings.
Any uncollected tax due to this limit will be addressed through HMRC’s end-of-year reconciliation process.
A payroll delay employers can take advantage of
Before the announcement, there were fewer than 12 months for you to get your payroll processes in order.
While the delay is good news, it is not a time to sweep the matter under the rug.
It instead presents an ideal opportunity to review your payroll processes and ensure you are fully prepared for the transition. Key areas for consideration include:
- Understanding which BIK your business provides and how they are currently reported
- Reviewing payroll software to ensure it can support real-time BIK reporting
- Considering the accuracy of benefit valuations and whether robust estimation methods are in place
- Assessing internal payroll and finance team readiness and providing necessary training
- Communicating the changes internally, particularly to HR and employee-facing teams
Future updates and support
HMRC will begin releasing draft legislation and technical guidance from Autumn 2025, with updates continuing through to April 2027.
Employers will not need to register to payroll most benefits under the new system, although separate registration will still be required for loans and accommodation, which will remain optional at first.
We strongly recommend that employers begin preparations well in advance.
While the changes are still some time away, the implementation should not be underestimated.
Need payroll advice?
As specialists in payroll and employment tax, our team is here to support you.
Please contact us today to discuss how we can help your business get ready for the mandatory payrolling of BIK and expenses in 2027.
