Global Employer Services News

This change is badged as simplification and the good news is that it will mean that there will be no requirement to prepare Forms P11Ds for employees every year.

Current Position – P11D and P11D(b)

As a quick reminder, the current position is that the taxable value of benefits and expenses provided to employees must be reported via Forms P11D and P11D(b) by 6 July following the end of the relevant tax year, unless an employer is already payrolling their benefits under a voluntary agreement with HMRC.

This involves calculating the amount to report, completing the forms and submitting them to HMRC, and using proprietary software (apart from smaller employers who can use HMRC’s software for up to 500 P11D forms).  

The employee is issued a P11D and pays the income tax due on the benefits received, either through self-assessment or via an adjustment to their PAYE tax code.  

Form P11D(b) is a dual-purpose return. It is a declaration that all the P11Ds are correct and complete, and a return of the Class 1A NIC payable. Therefore, whilst an employer may have payrolled every single benefit given to employees during 2024/25, the employer will still have a Class 1A NIC liability and will still need to prepare and submit a P11D(b) to HMRC and pay the NIC due. Employers must pay the relevant Class 1A National Insurance by 19 July following the end of the tax year, or 22 July for online payments.  

Currently, employers can apply for HMRC’s agreement to payroll most BIKs so that the benefit is reported and subsequently taxed under RTI (Real Time Information). This does not apply to accommodation benefits or loans with interest charged at less than the official rate, which must be reported on the P11D.

When Does Mandatory Payrolling of BIK Begin? 

Mandatory payrolling of BIK for income tax and Class 1A NIC purposes will go ahead from April 2026.

The reporting process for BIKs will be through the Full Payment Submission (FPS), the same process currently used to report salary to HMRC. 

However, employers will need to report more data than is currently required to provide a breakdown of the BIKs being reported through payroll, and to reflect the introduction of Class 1A NIC being payrolled. HMRC describe the amount of detail as “granular,” but there are no details yet, and these may not be forthcoming until the specifications for software developers and payroll providers are published. This is expected to occur between June and December 2025, which would not leave much time for employers to ensure that procedures are in place to collect all the information needed to meet the reporting requirements on a monthly basis, but HMRC will expect high levels of accuracy from day one.

Payrolling employment-related loans and accommodation will be voluntary for 2026/27, with a timetable for transitioning to mandatory payrolling of these benefits slated to be published “in due course.” Until then, Forms P11D and P11D(b) can be used to report loans and accommodation, but cannot be used for any other BIK. With the official rate of interest no longer fixed for a tax year (it may change on a quarterly basis from 6 April 2025 onwards), employers may find it easier to continue to use P11Ds for loan benefits while this is permitted.

An “end-of-year process” will be used if the value of BIKs isn’t known during the year, for example, if the benefits were provided by third-party suppliers. Details regarding this process and rules for special categories like globally mobile employees are expected. 

The not-so-good news is that BIKs will need to be payrolled in real time monthly, or weekly if the employer has weekly paid employees. If an employer pays at irregular intervals (for example, four-weekly), the position can become very challenging. While the payroll processing itself can be straightforward for some benefits, calculating the right amount to benefit on a timely basis can be complex.

What Should Employers Be Doing Now?

It is very important that the changes and their impact on employees be communicated in a timely fashion. There are also practical issues to consider:

• Joiners and leavers. Employers will need to review monthly employee movement to ensure payroll reporting is correct for real-time payroll reporting. How will they communicate this to employees, and will this new process be more complicated for the payroll team?  What will be the impact of the mandatory payrolling on Tax Codes? Will HMRC be able to update their systems to ensure the Tax Code of everyone who has a BIK restriction is updated correctly for tax year 2026/27?

• Benefits data. When company cars are provided to employees, there are complex rules to consider depending on fuel type, personal mileage reimbursement, or changes in cars as there will be substantial information to be provided to the payroll team. In the context of relocation costs, who will be responsible for considering what element would be ‘qualifying’ and whether the tax exemption can be applied? Finally, if the employer has a benefits provider, how quickly can the required monthly changes be sent through to the payroll team to ensure payroll reporting deadlines are not missed?

• Variable pay periods. Do the current payroll process and records make it easy to calculate payments for employees with variable pay periods to feed this information into payroll in time to include correct BIK amounts?

• Internationally mobile employees. How will the employer report BIKs for these individuals from April 2026 if a modified payroll is not being operated?  New rules will be introduced but details are not available at this time.

• Payroll process. Employers should decide who within the payroll or finance teams will be responsible for sourcing and collating benefits data and checking that taxable values are correct every month. What will this process look like and will it be robust enough to capture all necessary information? Do the current payroll reporting systems need to be reviewed in line with the expectation that this additional monthly reporting may require a new process to be implemented?

Increased Risk of Penalties

The increased number of calculations and the quantum of tax being collected through the payroll increase the possibility of errors. It is important for employers to test their systems thoroughly and be aware of the potential risks. HMRC will adopt a “soft touch” for the 2025/26 tax year only.

Key Takeaways for Employers

These changes represent a significant change for all employers. Do not underestimate just how complex they are, how many parts of the organisation they might affect and just how long they will take to bed in. Employers should: 

• Verify that data collection and payroll systems are ready for payrolling benefits. 

• Confirm that there are systems in place or support for the calculation of benefits in each pay period. 

• Communicate the impact of the changes to employees. They will need to be able to plan for the impact on net pay. 

• Not leave it to the last minute – employers will need time to assess readiness and get the systems in place for payrolling.

• Consider payrolling some or all of benefits from April 2025 on a voluntary basis to give themselves time to test the system while P11Ds are still available as a backup.

BDO UK’s employment tax specialists are here to help with all aspects of the transition and beyond.

Caroline Harwood
BDO in United Kingdom

An earlier version of this article was originally published in Croner-i publication Tax Weekly.