Mandatory Payrolling of Benefits in Kind (BiKs): Full Guide for UK Employers 26-27

Mandatory Payrolling of Benefits in Kind (BiKs): Full Guide for UK Employers

HMRC has published draft guidance and draft legislation explaining how Benefits in Kind (BiKs) will be taxed and reported in real time. This change—commonly referred to as “mandatory payrolling”—represents one of the biggest updates to payroll reporting in years.

Below is a full, structured guide based only on HMRC’s official documentation.

1. Introduction

HMRC’s introduction explains that Benefits in Kind will need to be reported through payroll at the time the benefit is provided, instead of at the end of the tax year using P11Ds.

Link:
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/introduction

2. Who Should Read This

HMRC states that this guidance applies to:

• All UK employers providing taxable benefits
• Payroll managers and payroll software providers
• Accountants and payroll bureaus
• Anyone responsible for administering or reporting benefits

Link:
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/who-should-read-this

3. How Mandatory Payrolling Will Work (Default Operation)

Under the default operation:

• Employers must identify when a benefit becomes available to an employee.
• The cash equivalent must be calculated for each pay period.
• This value must be added to payroll for PAYE purposes.
• PAYE tax is calculated on salary plus the benefit value.
• The benefit amount is then removed before the employee is paid (so it’s not treated as cash).
• Accurate records must be kept for each employee.

Link:
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/the-default-operation-of-mandatory-payrolling

4. Reporting Requirements

Employers must include benefit information as part of their FPS (Full Payment Submission).

This includes:

• Benefit type
• Cash equivalent
• Start and end dates
• Annualised amount
• Year-to-date totals

HMRC has listed the additional fields likely to be required:

Link (reporting requirements):
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/reporting-requirements

Link (Annex 3 fields):
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/annex-3-additional-benefits-in-kind-fields-likely-to-be-required-on-full-payment-submission-returns

5. Preparing for Mandatory Payrolling

HMRC recommends that employers begin preparing ahead of implementation by:

• Reviewing all Benefits in Kind provided
• Ensuring correct valuation methods
• Checking whether payroll software supports BiK payrolling
• Updating internal processes
• Training payroll and HR teams
• Communicating changes to employees

Link:
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/getting-ready-for-mandatory-payrolling-of-benefits-in-kind

6. How to Report a Benefit in Real Time

Employers must identify:

• When the benefit is first available
• How to calculate the cash equivalent for the period
• How to report it within the pay period
• How to maintain correct year-to-date totals

Link:
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/how-to-report-a-benefit-in-kind-in-real-time

7. If PAYE Cannot Be Fully Collected

If an employee’s earnings are not enough to collect the full amount of PAYE tax on a benefit, HMRC explains that:

• Employers must not reduce pay below the National Minimum Wage.
• Any outstanding tax must be carried forward to later pay periods where possible.
• Any remaining uncollected tax must be reported to HMRC.

Link:
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/what-happens-when-the-full-amount-of-tax-cannot-be-collected-either-within-a-pay-period-or-tax-year

8. Reporting Class 1A National Insurance

Even though Benefits in Kind will be payrolled, employers still need to:

• Report Class 1A NICs
• Submit form P11D(b) at year end

Link:
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/reporting-class-1a-national-insurance-contributions

9. Employees Leaving During the Year

When an employee leaves:

• Benefits must be reported up to the final day of employment
• P45s must include payrolled benefit information
• Any uncollected tax must be handled according to HMRC rules

Link:
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/dealing-with-employees-who-leave-during-the-tax-year

10. Penalties and Interest

HMRC may charge penalties for:

• Late FPS submissions
• Incorrect values
• Missing information
• Incorrect Class 1A NIC reporting

Interest may also apply.

Link:
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/penalties-and-interest

11. Mergers and Acquisitions

During mergers or business transfers:

• Benefit history must be preserved
• Year-to-date totals must be maintained
• Responsibility for reporting must be clear

Link:
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/mergers-and-acquisitions

12. Moving Employees Between Payrolls

When an employee transfers between payrolls:

• Benefit availability dates must stay accurate
• Benefit amounts must transfer correctly
• FPS submissions must remain consistent

Link:
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/moving-employees-from-one-payroll-to-another

13. Payment Reference Numbers, P60s, and P45s

HMRC provides details on:

• How benefits will appear on P60s
• How they appear on P45s
• How reference numbers work under the new rules

Link:
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/payment-reference-numbers-p60s-and-p45s

14. Future Updates and Implementation Timeline

HMRC will publish:

• Finalised legislation
• Further examples
• Updated technical specifications

Link:
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/future-updates-and-timeline-of-delivery

15. Questions, Support and HMRC Contact Routes

Employers can contact HMRC using the channels listed here:

Link:
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/what-to-do-if-you-have-questions-or-concerns

16. Examples and Draft Legislation

HMRC offers:

• Example scenarios
• Practical illustrations of payrolling
• Draft legislation text

Links:
Examples (Annex 1):
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/annex-1-payrolling-examples-for-different-scenarios

Draft legislation (Annex 2):
https://www.gov.uk/guidance/draft-guidance-and-legislation-to-aid-preparation-for-reporting-benefits-in-kind-in-real-time/annex-2-draft-legislation

Conclusion

Mandatory Payrolling of Benefits in Kind marks a major shift in how UK employers must report and tax employee benefits. The move to real-time reporting aims to simplify year-end processes, reduce the need for P11Ds, and ensure tax is collected at the right time.

By reviewing benefits, updating payroll processes, and preparing ahead of implementation, employers can ensure a smooth transition to the new requirements.