Navigating the complexities of payroll can be challenging, especially with the upcoming changes to payrolling benefit in kind. With new rules affecting how businesses report employee benefits, it’s crucial to stay informed and adapt. This guide explains what payrolling benefit in kind means, the changes you need to be aware of, and how to prepare your business for these adjustments.
What Is Payrolling Benefit in Kind?
Payrolling benefit in kind refers to the process of taxing employee benefits through payroll, rather than reporting them at the end of the tax year via a P11D form. By using this system, employers can deduct tax on benefits in real-time, ensuring that employees pay the correct amount of tax on their benefits when they receive them, rather than waiting for an annual adjustment.
For example, if an employee receives a company car, private health insurance, or a discounted loan, the taxable value of these benefits is processed through payroll alongside their salary. This real-time tax adjustment helps employees avoid surprise tax bills at the end of the year and simplifies the reporting process for employers.
What Is a Benefit in Kind?
A benefit in kind (BIK) is any non-cash benefit provided to employees as part of their remuneration package that is taxable. While these benefits are not paid in cash, they hold financial value and are subject to income tax, and employers may also be required to pay National Insurance contributions on them.
Common examples of benefits in kind include:
- Company cars and fuel
- Private medical insurance
- Interest-free loans
- Employer-provided accommodation
What Changes Are Happening?
The shift towards payrolling benefit in kind is part of HMRC’s push to modernise tax reporting. In the past, many employers reported BIKs annually using a P11D form, which meant employees often had to pay extra tax at the end of the year. The new changes encourage employers to move towards payrolling these benefits, offering a real-time solution for both employers and employees.
From 6 April 2025, payrolling benefits in kind will become mandatory for most employers. The aim is to make tax deductions more straightforward, allowing employees to pay tax on their benefits as they receive them, instead of dealing with unexpected tax bills after the tax year ends. Moving forward, employers will be expected to use the payrolling system for most employee benefits, reducing reliance on the P11D form.
What You Need to Do
To ensure compliance and a smooth transition to payrolling benefits in kind, here’s what your business should do:
- Review your benefits: Determine which benefits can be payrolled. Not all benefits in kind are eligible for payrolling—accommodation and interest-free loans, for instance, are excluded.
- Register for payrolling with HMRC: Employers must register for payrolling benefits through HMRC’s online portal before the start of the tax year.
- Update your payroll system: Ensure that your payroll software is equipped to handle payrolling benefits in kind. Most modern systems have this functionality, but it’s important to verify with your provider.
- Communicate with employees: Keep your employees informed about how the changes will impact their pay and tax obligations. Clear communication will help avoid confusion.
- Maintain proper records: Even though payrolling simplifies the process, it’s essential to keep accurate records of all benefits provided for both tax and audit purposes.
Need Help Transitioning to Payrolling Benefit in Kind?
Adapting to these changes doesn’t have to be complicated. If you’re unsure about how to switch your business to payrolling benefit in kind or need advice on managing employee benefits, we’re here to assist. Get in touch with us today for support in making this transition seamless.
Follow us on LinkedIn and Instagram to see our latest articles and updates.