Mandating the payrolling of benefits in kind from April 2027

On 28 April 2025 HMRC published a “Technical note: Mandating the reporting of benefits in kind and expenses through payroll software – an update”. The title by referring to the “reporting of” and not the “payrolling of” gives a hint that even employers who are currently payrolling benefits will need to review their processes. An explanation in the technical note explains that:

“Reporting requirements

From April 2027, the reporting process for BiKs and expenses will be through the Full Payment Submission (FPS). This is the same process employers currently use to report salary and other employee details to HMRC when payments are made to employees.

The FPS will be used to report the taxable value of BiKs and expenses so that both Income Tax and Class 1A NICs can be reported in real-time.

The number of fields for reporting BiKs and taxable employment expenses in RTI (via an FPS) will be increased to align with what is currently reported in the P11D and P11D(b) forms. 

Under the present voluntary payrolling arrangements, limited data is collected on BiKs. To support the introduction of mandatory payrolling, HMRC will need visibility of the BiKs in the FPS to ensure that the correct tax is being reported and paid. Without this information, HMRC would need to conduct more manual compliance interventions to manage non-compliance risks – which would be administratively burdensome for both taxpayers and HMRC” (emphasis added).

All employers will need to review the data that they currently provide HMRC via their payroll submissions (FPS) and compare it with the full list of data fields that will be required that can be found in the annex to the technical note.

HMRC have said that “We will confirm the data fields we require later in the year when we plan to publish further software technical information”.

How to payroll

The technical note outlines how HMRC envisages the process working:

“The general rule will be that employers will need to divide the annual cash equivalent of the BIKs by the number of relevant pay periods for each employee. The resulting figure for each pay period will be liable to Income Tax, in a similar way to earnings. This figure will also be liable to Class 1A NICs each pay period. This must be reported alongside employee earnings in each pay period. If the BiK value is not known at the beginning of the year, then employers must estimate the taxable value, and divide this by the number of relevant pay periods”

Employers are how ever warned against using estimates of zero! The document stating that “Customers will be expected to use a reasonable estimate. This would preclude, for example, entering a zero value in circumstances where it is known at the time that the benefit will be material”.

There is also guidance on what to do if a benefit changes in year:

“If the cash equivalent changes during the year, then the employer must work out the revised taxable amount to payroll for the remaining pay periods for that tax year.  

We recognise that there may be situations where it is not known until some time after the tax year has started that an employee has received a BiK. In these cases, the BiK can be reported as soon as possible in the remaining pay periods for that tax year.  Earlier submissions do not need to be amended as long as the BiK is reported across the remainder of the relevant tax year”. 

Penalties and Interest

There will, of course, be penalties and interest if employers get this wrong but fortunately recognising the scale of change HMRC are proposing a soft landing:

“To support the smooth introduction of this change, customers who have made an error related to mandatory payrolling in their RTI returns for 2027 to 2028 will not be charged penalties for inaccuracies unless there is evidence of deliberate non-compliance”

There is, however, a warning, in the section on the Benefit in Kind update process:

“BIKs and expenses which could not be accounted for during the year

As confirmed in the Technical Note published following Autumn Budget 2024, there will be an update process for BiKs and expenses where the Income Tax and Class 1A NICs could not be determined during the tax year. 

In line with stakeholder feedback, HMRC recognises that there are situations where the taxable value will not be known during the tax year. For example, this could include fuel cards and employment-related loans and accommodation. In those instances, a reasonable estimate will be required as described under ‘Benefit value to be payrolled’ above.

The BiKs update process can be used to record any under- or over-payments of tax. Where this process is used, all BiKs must be reported by 6 July following the end of the tax year. The additional tax due or repayable will be taken into account in the end-of-year reconciliation process (P800), Simple Assessment and Self Assessment. Any additional Class 1A NICs due will be payable by 22 July following the end of the tax year.

Where employers do not take reasonable care in applying these processes, employers may be liable to a penalty for inaccurate returns and interest on amounts of late paid tax and Class 1A NICs” (emphasis added).

Fortunately, HMRC have again recognised the scale of the change and say that:

“To support the smooth introduction of this change, no such penalties will apply in relation to returns for 2027 to 2028” (emphasis added).

Loans and Accommodation

From April 2027 employers will be able to payroll loans and accommodation on a voluntary basis.  The aim is to eventually bring these benefits into mandatory payrolling and HMRC will publish further details in due course. HMRC say that:

“To enable voluntary payrolling of these BiKs, we will permit the use of estimated figures to be included in the taxable value calculation within the tax year.

Where the cash equivalent changes, any under or overpayments of tax can be accounted for either by adjusting the amount of BiK to payroll in future pay periods, or by using the BiKs update process described above”.

The Road map

HMRC have published the following timeline:

Next steps

Employers should use this extension of time wisely as this will be a significant change. If they haven’t already started they need to start planning now and not waste the extra year that has been granted.