From company cars and private healthcare to salary sacrifice arrangements and other perks, Benefits in Kind (BiK) can play an important role in attracting and retaining employees. They can also, however, create additional responsibilities for employers when it comes to calculating, reporting and collecting tax.
Amid changing reporting requirements, increased focus on payroll accuracy and greater scrutiny around employee benefits, businesses need robust payroll processes in place to prepare for the introduction of mandatory payrolling of Benefits in Kind, coming in phases from April 2027.
What is Benefit in Kind (BiK)?
A Benefit in Kind is a benefit provided by an employer that has a monetary value but is not included as part of an employee’s salary.
Common examples include:
- Company cars and fuel
- Private medical insurance
- Employer-paid subscriptions or memberships
- Interest-free or low-interest loans
- Items provided for personal use
How is BiK processed through payroll?
Payrolling BiK means adding the taxable value of an employee’s benefits to their payroll each pay period, allowing Income Tax to be collected in real time. Traditionally, employers have reported benefits using forms such as the P11D, with HMRC then adjusting an employee’s tax code to collect the tax due. Payrolling changes this process by incorporating taxable benefits directly into payroll calculations.
For employers, this means having accurate and up-to-date information about:
- Which employees receive benefits
- When benefits start, change or end
- The taxable value of each benefit
- Any applicable exemptions or reductions
- Changes to employee circumstances that could affect the benefit
When will payrolling BiK become mandatory?
The Government is introducing mandatory payrolling in two main phases.
Phase 1: from 6 April 2027
From the start of the 2027/28 tax year, mandatory payrolling will apply to:
- Company cars and car fuel provided for private use
- Company vans and van fuel benefits
- Private medical insurance and employer-funded healthcare
- This means employers providing these benefits will need to ensure their payroll systems and processes are ready to calculate and report them in real time.
Phase 2: from 6 April 2028
From the 2028/29 tax year, mandatory payrolling will extend to most other taxable benefits, expected to include gym memberships and other general services.
The phased introduction gives employers time to review their current arrangements, assess their payroll systems and identify any changes they need to make before the new requirements take effect.
What happens to P11Ds?
P11D and P11D(b) reporting will continue during the transitional period for benefits that have not yet moved into the mandatory real-time system. Employers therefore need to understand which benefits are subject to mandatory payrolling, and which remain subject to existing reporting requirements during each tax year.
Common mistakes employers make when processing BIK
BiK errors are often caused by administrative oversights rather than deliberate non-compliance, but even small mistakes can create issues for both employers and employees. Some of the most common challenges include:
Not identifying all taxable benefits.
Benefits are sometimes missed when they are managed outside of payroll, such as through HR, finance teams or external providers.
Delayed communication of changes
If payroll teams are not informed when an employee receives a new benefit, changes vehicles or leaves the business, calculations may become inaccurate.
Incorrect benefit calculations
Different benefits have different valuation rules. Applying the wrong calculation method can result in incorrect tax reporting.
Relying on manual processes
Manual spreadsheets and disconnected systems increase the risk of errors, particularly for businesses managing multiple employees and benefit types.
Reporting requirements
HMRC is moving towards a more streamlined approach to benefit reporting, with greater integration between benefits and payroll systems. The reforms are designed to make the process more transparent by bringing more benefits into real-time payroll reporting.
For employers, this highlights the importance of having reliable payroll processes and accurate records.
Now is the right time for businesses to consider:
- Reviewing current benefit arrangements
- Ensuring payroll systems can handle BiK processing Improving communication between HR, finance and payroll teams
- Maintaining clear records to support calculations
At EKW Group Payroll, we help businesses manage their payroll requirements with accuracy and confidence, ensuring employee benefits are processed correctly, and payroll obligations are met.
