Payrolling of Benefits Explained: A Practical Guide for Employers

While P11D forms have been a staple of UK payroll processes since the early 1960s, 2027 is set to bring major change.

Projections are that we’ll see the abolishment of P11Ds for most benefits and the end of voluntary payrolling as it becomes mandatory.

Until now, employers have had the flexibility to decide whether they want to payroll benefits in kind (BIK) and which specific benefits to include, rather than completing P11D forms.

With big changes on the horizon, it’s worth considering making the change now, or at least preparing your business to do so.

This guide breaks down how payrolling benefits in kind works, the upcoming 2027 legislative changes and tips for employers to navigate payrolling BIK now.

What Are Taxable Benefits in Kind?

While many businesses have staff perks like free parking, coffee or “Friday pizza”, taxable benefits in kind refer to non-cash benefits provided as part of employment that carry a tax liability.

Examples can include:

Company cars
Gym memberships
Health and well-being plans
Private medical insurance
Interest-free/low-interest loans (cannot be payrolled)
Accommodation (also cannot currently be payrolled)

When you “payroll” a benefit in kind, you include the taxable value of the benefit in the employee’s taxable pay each pay period (monthly/weekly).

This method also deducts income tax (PAYE) through payroll.

Payrolling BIK means there’s no need to submit a P11D form for that benefit at the end of the tax year (a document that reports benefits and expenses given to employees on top of their salary).

However, P11Ds will still be needed for benefits like accommodation or employee loans until 2027, when these too may be included under mandatory payrolling.

Why Do Employers Provide Payroll Benefits in Kind?

There could be many reasons why employers choose to provide payroll benefits in kind, such as:

Less Admin: With no need for P11Ds for payrolled benefits, payrolling benefits in kind reduces administrative burdens for finance teams.
More Accurate Tax: Employees would no longer need to wait for HMRC to manually adjust their tax code, as the effect is immediate.
Simplified End-Of-Year Processes: As this process is immediate, everything will have already been handled through payroll throughout the year, avoiding the hurry to complete P11Ds for every employee in July.
Customised Benefit Management – Employers can tailor which benefits to payroll based on workforce needs.

Of course, there are still some drawbacks to consider. For example:

Doesn’t Apply to All Benefits: Not all benefits can be payrolled, so some benefits, like accommodation expenses, must still be reported via P11D (until 2027).
Software Limitations: Not all software systems can handle payrolling benefits smoothly, so manual workarounds or upgrades may need to be accounted for before starting the process.
Upfront Planning Required: To be eligible for payroll benefits in kind, employers must register with HMRC before the tax year starts (before 5th April). Planning is therefore required, as if you miss the window, you’d have to wait until next year.
Compex Payroll: In some cases, payrolling BIK could make payroll more complicated. For example, if someone returned a company car in September, their benefits would change mid-year, and need to be accurately calculated to reflect their tax.

What’s the Difference Between Payrolling Benefits in Kind and “Salary Sacrifice”?

While both of these options are ways of giving employees extra value beyond just their cash salary, there are key differences between the two.

A benefit is kind is given on top of salary, while a salary sacrifice happens when an employee gives up part of their salary in exchange for a benefit (such as extra pension).

A salary sacrifice is not taxable or subject to employee NIC in most cases, and the gross salary is contractually reduced to account for this.

The Optional Remuneration Arrangement (OpRA) rules introduced in 2017 limited the tax/NIC benefits of salary sacrifice for most BIKs.

So, that means if a benefit is provided via salary sacrifice and OpRA applies, the salary given up or the taxable value of the benefit (whichever is higher) is used for tax purposes.

What Happens When an Employee Leaves?

As soon as the employee leaves the business, benefits cease, typically on their final day.

However, in some cases, employees might be permitted to use the benefit beyond leaving the business.

In this instance, you must report the remaining benefit via a P11D, as you can’t payroll after they’ve left. You may also need to provide a P46 (Car) form if it’s a company car.

The employee’s final payslip should include all taxable salary and any final benefit-in-kind payrolled amounts. Next, their P45 is issued as standard (which will show taxable pay only).

What Are the Changes From April 2027?

Currently, payrolling benefits in kind is voluntary, and it has been since April 2016.

However, from April 2027 (originally April 2026, but this has been pushed back a year), payrolling benefits in kind will become mandatory.

This means that employers will no longer need to register for payrolling benefits in kind before the given tax year, as this will become an automatic, mandatory process for all businesses.

HMRC will automatically remove benefits from employees’ tax codes in readiness for payrolling from April 2027.

How Will the New Changes Affect Employers?

Employers who already offer payroll benefits in kind will find the transition easier to navigate. There are a few changes to be aware of, though:

Class 1A NIC – There will also be a change to Class 1A NIC contributions from April 2027, as they will also be paid via payroll throughout the year.
Loans & Accommodation Benefits – Although they cannot currently be included in voluntary payrolling, they will be able to from 2027.
System and Process Updates – Employers must ensure systems, data capture, and training are up to scratch.

However, for those unaccustomed, the changes – and the deferring of the changes – allow employers to get to grips with what’s needed to prepare for payrolling benefits in kind.

Do processes need updating? Does the software need an upgrade? Do staff need training?

Ensuring your business is ready for the change is imperative for a smooth transition when the changes come into effect in 2027.

Tips for Employers for Considering Payrolling Now

Considering payrolling benefits in kind earlier than 2027? Here’s what to keep in mind:

Consider Timing – Is this definitely the best time to pay payroll benefits in kind? It may be worth having a full reflection of your overall benefit offering before the changes are brought in, ensuring you’re offering the best package.
Registering – You also need to register with HMRC before 5th April to be eligible for the upcoming tax year, so planning is crucial to ensure you’re prepared in time.
Current Payroll Software – A first port of call is checking that your current software meets the functionality requirements to allow you to pay payroll benefits. If not, you may need an upgrade or to consider an alternative option.
Ensure Accurate Data – All benefit data throughout the year must be accurate. It also needs to be available in ample time for the payroll reporting so it can be processed. If the data isn’t accurate or reliable, potential penalties could be enforced (which may directly impact your employees’ net pay).
Educating Employees – Without explanation, employees may wonder why their taxable pay looks higher and think they’re being overtaxed. Educating them on the changes means they can keep an eye out for any PAYE code changes to ensure that income tax isn’t being collected twice on the same benefit.
Stay Updated – Plans change (as we’ve seen from the 2026 to 2027 delay), so keep an eye out for HMRC’s upcoming guidance in autumn 2025.

Our Final Thoughts

With mandatory payrolling of benefits in kind coming in April 2027, now is the time to invest in payroll management services so you can:

Understand the changes
Evaluate your systems
Educate your employees
Get ahead of the curve

By acting early, you can avoid a rushed transition, minimise admin and ensure a smoother experience for your whole team.

Need some professional advice for your business? We can help! We offer tailored guidance on payroll, employee benefits & tax-efficient compensation strategies for both individuals and businesses. Get in touch with a member of our expert team today.

Terry Smith

Terry started life at HM Revenue and Customs before moving to Ashdens and then on to BDO and Chantrey Vellacott, the combination of which has provided Terry with a wide breadth of experience which has proved invaluable when helping a broad range of clients with their tax affairs.

Whether it involves meticulously organising a client’s tax affairs or leveraging his expertise to mitigate their tax exposure, Terry has a passion for delivering tangible results.