What is a taxable benefit?
Taxable benefits – also known as benefits-in-kind (BIK) – are perks or expenses provided to employees that aren’t part of their salary but still hold monetary value. Common examples include company cars, private medical insurance, gym memberships, and interest-free loans from employers. Historically, these benefits were reported via a P11D submission at the end of the tax year, and employees would settle any tax due through their tax code adjustments.
Under payrolling of benefits, the tax on these perks will instead be collected through the monthly PAYE tax deduction, meaning employees pay tax on their benefits as they receive them, rather than through a delayed adjustment. This change brings tax collection in line with how salaries and bonuses are already taxed, offering a more predictable approach for both employers and employees.
How does payrolling of benefits work?
Employers who payroll benefits will include the taxable value of these perks in employees’ regular payroll calculations. This means that rather than waiting for a P11D at year-end, employees will see the tax deducted from their wages in real time.
To start payrolling benefits, employers need to register with HMRC before the beginning of the tax year in which they want to apply it. Once registered, benefits must be processed correctly in payroll software, ensuring that tax is deducted accurately each pay period. Employers will still need to submit a P11D(b) form annually to report the total Class 1A National Insurance contributions due, but the cumbersome individual P11D forms will largely be eliminated.
What changes in April 2027?
Currently, payrolling benefits is an optional system, but from April 2027, it will become mandatory for most employers. The full details are yet to be finalised, but HMRC’s goal is clear: simplify the way benefits are taxed and reduce the administrative burden of separate year-end reporting.
For employers who have yet to adopt payrolling of benefits, the next two years offer a crucial window to get systems in place, test processes, and ensure payroll software is up to date. Businesses that don’t prepare in advance risk facing compliance issues and potential fines.
P11D vs. Payrolling: what’s the difference?
For years, employers have relied on P11D submissions to report taxable benefits. This system, while effective, has its drawbacks. P11Ds are submitted after the tax year ends, meaning employees only see tax adjustments months later, often leading to unexpected tax bills.
With payrolling of benefits, tax is deducted as employees receive their benefits, making tax payments more predictable. It also reduces admin for employers, as they no longer need to submit individual P11D forms for each employee. Instead, only a P11D(b) form is required to report Class 1A National Insurance contributions.
To summarise the difference between P11D reporting and the new rules on payroling of benefits:
| Feature | P11D Reporting (Old System) | Payrolling of Benefits (New System) |
| Tax Collection | Adjusted via employee tax codes after year-end | Deducted in real time through PAYE |
| Employer Reporting | Annual P11D submission for each employee | No individual P11Ds; benefits processed through payroll |
| Employee Taxation | Tax paid later, sometimes leading to unexpected bills | Tax deducted as benefits are received, avoiding surprises |
| Admin Burden | High – separate year-end reporting required | Lower – more integrated with payroll |
| Class 1A National Insurance (NI) | Still requires P11D(b) submission | Still requires P11D(b) submission |
| Implementation Timeline | Ends in April 2026 | Becomes mandatory from April 2027 |