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Overview
Payrolling Benefits in Kind (BiK) is a method that employers use to simplify how certain employee benefits are taxed and reported. Employers can tax and report certain benefits through payroll instead of using year‑end P11Ds, improving accuracy, reducing admin, and giving employees clearer take‑home pay.
From April 2026 to April 2027, payrolling BiK remains voluntary, giving employers the opportunity to prepare and refine processes.
From April 2027, it will become mandatory for all employers, making a solid understanding of payrolling essential.
Employers need to understand how to register benefits, calculate taxable values, apply relevant rules, and manage salary‑sacrifice arrangements to ensure fair taxation and minimise risk. This article explains the key concepts, eligible benefits, calculation methods, and communication best practices to help organisations prepare and transition smoothly.
In this article, the term 'payrolling' always refers to 'payrolling Benefits in Kind'
Contents
Payrolling Benefits in Kind and Why It Matters
Payrolling Benefits in Kind (BiK) changes not just how benefits are reported, but when tax is paid. Traditionally, employees were taxed on benefits via year-end reporting through P11Ds, often creating unexpected tax bills and administrative headaches. With payrolling, tax on eligible benefits is calculated and deducted in real time through payroll.
Employees pay tax as they receive the benefit. This removes the lag between receiving a benefit and paying tax on it, avoiding year-end surprises.
Employers and employees avoid follow-up adjustments. No more chasing retroactive tax corrections, tax code changes or unexpected HMRC letters
HMRC receives cleaner, earlier data. Real-time submissions improve compliance and reduce post-year-end queries
Removes P11D Tax Lag
Without payrolling, benefits are reported after the tax year closes. Employees often face unexpected tax code changes or bills, and payroll teams spend months answering questions like “why has my tax changed?”
With payrolling:
P11Ds are no longer required for those benefits
Delayed tax code corrections are largely eliminated
Employee disputes over tax calculations are significantly reduced
Reduces Compliance Risk
Traditional P11D reporting concentrates risk through manual processes, spreadsheets, and deadlines. Errors are often identified late and corrections can be substantial.
Payrolling spreads the risk across the year:
Errors surface early, making them smaller and easier to fix
HMRC submissions align directly with payroll data, reducing reporting conflicts
The likelihood of penalties or fines is lowered
Simplifies Payroll Operations
Payrolling removes parallel reporting and reduces year-end workload, but it introduces additional complexity into each pay run.
Well-designed systems and procedures absorb it, making ongoing payroll cleaner and more manageable.
Directly Affects Employee Trust
Employees often do not care about the legislation. They care about predictable net pay, clear explanations, and not being surprised by HMRC correspondence.
Payrolling Benefits:
Makes deductions visible, regular, and explainable
Requires clear communication both before and after the tax year
Builds employee confidence that payroll is accurate and transparent
The Bottom Line
Payrolling Benefits matters because it moves taxation into real-time payroll, reducing year-end risk, employee confusion, and compliance exposure. It is not inherently simpler, but it is operationally cleaner over the tax year, provided payroll data is accurate, and systems are robust.
Fourth's BIK module and service are designed to protect the customer, not expose them. Knowledge of the benefits being payrolled and how the process works is critical. The system cannot carry users alone.
Key Concepts
With the foundation of payrolling understood, it is essential to break down the key concepts that make it work effectively. These are the core areas employers and payroll teams must master to ensure accurate calculation, reporting, and communication of benefits.
From registering benefits to handling tax liabilities, calculating cash equivalents, and managing optional remuneration schemes, each concept plays a role in reducing risk, maintaining compliance, and keeping employees informed.
The following sections will guide you through each concept, explaining its purpose, impact, and best practice considerations.
Registering to Payroll Benefits
Before employers can payroll Benefits in Kind, registration with HMRC is mandatory. For the 2026–2027 tax year, employers must complete this process before 6 April 2026 using the Payrolling Employees’ Taxable Benefits and Expenses online service.
Key points about registration:
Employer responsibility: Fourth does not register benefits on behalf of customers. This must be done directly by the employer through HMRC’s online service
P11D exemption: Once a benefit is registered for payrolling, employers do not need to submit a P11D for that benefit
Benefit-by-benefit registration: Not all benefits need to be payrolled. Registration is completed on a benefit-by-benefit basis, allowing some to remain under the traditional P11D reporting process
Employee tax codes: Registration will automatically adjust the tax codes of employees receiving payrolled benefits. Employers can exclude specific employees if they do not wish to payroll benefits for them, leaving their benefits to be reported via P11D
Missed registration: If an employer fails to register a benefit before 6 April 2026, they cannot payroll that benefit for the tax year
Mandatory from 2027: While payrolling is voluntary for 2026–2027, Payrolling becomes compulsory from April 2027, with no registration required
Exceptions: Certain benefits, such as Interest-Free and Low-Interest Loans and Living Accommodation Benefits, cannot be payrolled. From April 2027, these benefits can be payrolled voluntarily with mandatory payrolling expected from April 2028
Excluding Employees from Payrolled Benefits
Once an employer is registered for payrolling Benefits in Kind, there are specific rules around which employees are included:
Cancelling overall registration: Employers can only cancel their entire payrolling registration before the start of the 2026/27 tax year. Once the tax year begins, all registered benefits must be payrolled for eligible employees. From the 2027/28 tax year, payrolling benefits is mandatory, and there is no registration or de-registration
Excluding individual employees: Employers can remove specific employees from payrolling at any time by simply stopping to process benefits via payroll. Any benefits provided to these employees for the remainder of the year must instead be reported via P11D
New employees: HMRC does not require that new employees automatically receive payrolled benefits in their first payroll. Their benefits can initially be reported via P11D if they are not included in the payrolling process
HMRC year-end reconciliation: At the end of the tax year, HMRC combines the total cash equivalent of payrolled and P11D-reported benefits. Accurate reporting ensures the totals align with HMRC expectations
Mandatory payrolling from April 2027: After this date, P11D reporting is no longer an option. All eligible benefits must be payrolled, with the exceptions of Interest-Free and Low-Interest Loans and Living Accommodation Benefits
Employee Communication
Effective employee communication is critical when implementing payrolling of Benefits in Kind. Clear, timely updates reduce confusion, build trust, and prevent disputes over tax deductions. Communication should occur both before and after the tax year.
Pre-Tax Year Communication
For all employees to receive payrolled benefits:
Content: Explain the transition from P11D reporting to payrolling, including what payrolling means for them, how it works, and how it affects their net pay
Timing: Before the start of the tax year, or immediately for new joiners mid-year
Tax code updates: Employees should be informed that their tax code will be updated to remove any adjustments related to prior P11D submissions
Purpose: Pre-tax year communication ensures employees understand the changes and helps prevent queries or disputes once deductions begin
Post-Tax Year Communication
For all employees who have received payroll benefits in the Tax Year:
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Content: Provide a summary of benefits for the year, including:
Payrolled benefits, their value, cash equivalent, and associated tax liabilities
Optional remuneration schemes (e.g., salary sacrifice) and their impact
Benefits not payrolled (reported via P11D)
Timing: By 1 June following the end of the tax year
Purpose: Ensures employees have a clear record of all benefits, tax, and adjustments, reinforcing transparency and trust
Benefits Tax & National Insurance Liability
Understanding the tax and National Insurance (NI) implications of payrolled benefits is critical to ensure accurate payroll processing and compliance.
Employee Income Tax: Most benefits create a liability for employee income tax. If a benefit is payrolled, this tax can be collected through payroll in real time. If the benefit is not payrolled, income tax is reported and collected via the P11D process
Employer National Insurance (Class 1A): Employers are generally responsible for National Insurance on benefits through Class 1A NIC. For the 2026–2027 tax year, these NICs are still reported and paid annually via P11D(b). From April 2027, when payrolling becomes mandatory, this process will change
Timing vs. Responsibility: Payrolling changes when tax is collected, but not who is liable. Employees remain responsible for their tax, and employers remain responsible for NI, but deductions happen through payroll rather than retroactively
Benefits Treated as Earnings: Some benefits are treated like regular earnings. These create immediate income tax and Class 1 NIC liability for both the employer and employee. In such cases, the liability must be processed in full in the next available payroll rather than being spread across the year
Event Types Matter: Each benefit may include multiple Event Types, each with different tax treatments. Reviewing the benefit type and associated Event Types is essential to determine the correct tax and NI liability for each scenario
Accurate classification of benefits and understanding their tax treatment ensures compliance with HMRC rules, prevents under- or overpayment of tax, and reduces post-year-end reconciliations.
Our Supported Benefit Types article highlights the different liability due on each benefit and its Event Type.
Benefits that can be Payrolled
Not all employee benefits are eligible for payrolling, so it’s important to know which can be included in payroll calculations. For the 2026–2027 tax year, the following benefit types can be payrolled:
Assets Transferred – e.g., goods or shares sold to employees below market value
Payments Made on Behalf of the Employee – e.g., personal bills paid by the employer
Vouchers – gift cards or other redeemable vouchers
Credit, Debit, and Charge Cards – where used for private expenditure
Mileage Allowance Payments – not taxed at source
Company Cars & Car Fuel – including associated fuel benefits
Company Vans & Van Fuel
Private Medical Treatment or Insurance
Qualifying Relocation Expense Payments and Benefits
Services Supplied – e.g., professional services paid for by the employer
Assets Placed at Employees’ Disposal – e.g., equipment or devices
Other Items – including, but not limited to, subscriptions and professional fees
Expense Payments Made on Behalf of the Employee
Exclusions
Living Accommodation and Interest-Free or Low-Interest Loans cannot be payrolled in the 2026/2027 tax year. From April 2027, these can be payrolled voluntarily.
Benefit Scenarios and Event Types
It’s important to understand that payrolling a benefit is not simply a matter of switching it on or off. Many benefits can involve multiple scenarios or “Event Types”, each with its own tax treatment and payrolling rules. These Event Types are detailed further in our Supported Benefits article.
Example: Assets Transferred
Employer to Employee: When an employer sells or gives an asset to an employee at below market value, a taxable benefit arises on the difference. This scenario attracts income tax liability that can often be spread across the tax year through payrolling, and Class 1A NIC reporting via P11D(b)
Employee to Employer: If an employee sells an asset to the employer, a taxable benefit is also created. In this case, attracting income tax liability that typically must be applied in full in the next payroll rather than spread across the year, and Class 1 NIC is also taken in the next available payroll
Different Event Types can influence:
How the taxable value is calculated
When the tax is applied in payroll
Whether the benefit can be spread or must be applied immediately
Understanding these nuances ensures accurate payrolling, correct tax and National Insurance deductions, and compliance with HMRC expectations.
For more details on supported benefit types and their Event Types, refer to our Supported Benefit Types article and HMRC’s Benefits A-Z guidance on GOV.UK. These resources provide comprehensive lists and examples to ensure correct payrolling of eligible benefits
Benefit Value & Cash Equivalent
When payrolling Benefits in Kind, it is essential to distinguish between the benefit value and the cash equivalent. While the benefit value shows the headline or commercial worth of the benefit, tax and National Insurance liability are determined by the cash equivalent.
Benefit Value
The benefit value represents what the benefit is worth before any tax rules are applied. It is not the cost to the employee and does not reflect what the employee actually pays.
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For most benefits, the value is based on:
The amount charged by the benefit provider to the employer
The cost of providing the benefit during the tax year
Some benefits, such as mileage allowances, company cars and car fuel, or company vans and van fuel, use a statutory valuation method rather than the provider cost
The benefit value is the starting point used to calculate the taxable cash equivalent
Benefit Cash Equivalent
The cash equivalent is the taxable value of a benefit, which is the figure HMRC expects employers to use to calculate:
Employee income tax
Employer NIC liability (Class 1A) or both Employer & Employee NIC liability (Class 1)
Key points about cash equivalent:
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Employees can contribute toward the taxable aspect of the benefit to reduce their liability. Contributions:
Must be taken from net pay, not gross pay
Cannot be generated using salary sacrifice
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The cash equivalent is derived from the benefit value and adjusted for:
The time the benefit is provided during the tax year
Employee contributions toward the benefit
The cash equivalent is what is taxed by HMRC, not the cost of providing the benefit. Employees pay income tax on this amount through payroll
Payrolling Calculation & Changes that Affect Benefits
Payrolling Benefits in Kind requires careful calculation to ensure the correct tax and National Insurance are applied each pay period. While detailed examples are covered in a separate article, the core calculation is straightforward:
Payrolling Calculation Steps:
Determine the total annual cash equivalent of the benefit
Divide by the number of pay periods in the tax year
Add the per-period amount as notional taxable pay on top of the employee’s normal earnings
Calculate income tax through standard payroll PAYE rules
Adjusting for Changes
Payroll is rarely static. Employees join or leave, benefits are added or removed, and real-life scenarios rarely align perfectly with the tax year. Payrolling must adjust to ensure the correct total taxable amount is applied.
Common scenarios include:
New starters joining partway through the tax year
Leavers whose benefits stop before year-end
Backdated benefits that were missed in earlier pay periods
Corrections to incorrectly recorded benefit values
Legitimate mid-year changes to benefit value due to provider price adjustments
Changes in pay frequency, such as moving from weekly to monthly payroll
These scenarios are normal payroll events, not errors by default. The complexity lies in handling them cleanly: ensuring FPS Corrections or payroll resubmissions are processed where needed, and that year-to-date totals match HMRC expectations.
Please note: Class 1A NIC will continue to be reported and paid via P11D(b) for the 2026–2027 tax year. Our BIK module will have Class 1A NIC calculations fully integrated and ready by the end of the 2026–2027 tax year. Class 1 NIC liabilities must currently be handled manually. We are actively building a notional Class 1 NIC solution to simplify this in future payroll cycles.
For a detailed walkthrough, including worked examples and complex scenarios, see our How Payrolling Benefits Works - Happy & Unhappy Path Scenarios article.
Notional Payments
Notional payments are amounts added to an employee’s payroll for tax purposes. They represent the taxable value of a benefit but do not result in actual cash being paid to the employee.
Purpose
Notional payments are used to collect tax on benefits in real time when payrolling Benefits in Kind
They allow payroll to include the cash equivalent of a benefit in PAYE calculations, ensuring the employee’s income tax liability is spread across the year rather than appearing in a lump sum at year-end
The employee’s take-home pay is not increased by the notional payment; it is purely a mechanism for correct tax deductions
How They Work
The cash equivalent of the benefit is determined (after any net employee contributions, where allowed)
This amount is added as notional taxable pay on the employee’s payslip for that pay period
PAYE calculates income tax on this notional pay, alongside normal salary
The total taxable pay reported to HMRC includes both normal earnings and notional payments, ensuring compliance
Example:
An employee receives a private medical insurance benefit with a cash equivalent of £600 per year, paid monthly:
£600 ÷ 12 months = £50 per month
Payroll adds £50 as notional pay each month
PAYE calculates tax on this £50 alongside normal earnings
The employee does not receive £50 in cash; it is solely for taxation purposes
Notional payments are a critical tool in payrolling, enabling accurate tax collection, compliance with HMRC, and smooth integration into regular payroll cycles.
The 50% Tax Rule (Overriding Limit)
The 50% tax rule is a standard payroll safeguard that applies across all payroll, not just to payrolled Benefits in Kind. It ensures that employers do not deduct more than 50% of an employee’s cash pay in tax in any single pay period, protecting take-home pay.
Why It Exists
This rule prevents employees from being left with insufficient net pay. It is particularly likely to be triggered when:
High-value benefits are combined with low or statutory pay (e.g., SSP)
Employees receive irregular or one-off payments that would otherwise push deductions above 50% of cash pay
The rule does not cancel tax liability. HMRC is concerned with the total taxable pay versus total tax paid over the year, not the timing of deductions. Outstanding amounts will be collected at a later date.
How It Works in Payroll
When the 50% rule applies, employers can pause payrolling benefits for that pay period (applies for the April 2026–2027 tax year only - this option will not be available from April 2027)
The full cash equivalent of the benefit is still reported to HMRC via FPS. HMRC tracks cumulative taxable pay and tax paid, regardless of whether the pay includes salary or benefits
Any tax not collected due to the 50% rule is carried forward and spread over the remaining pay periods. This can increase deductions later once the employee’s earnings allow
End-of-Year Outcome
If there are insufficient remaining pay periods to collect the unpaid tax, HMRC recovers the outstanding amount directly from the employee through end-of-year calculations (e.g., P800 or a tax code adjustment)
Optional Remuneration (Salary Sacrifice)
Salary sacrifice (also known as Optional Remuneration Arrangement, or OpRA) is an agreement between an employee and employer to exchange cash pay for a benefit. While the employee reduces their cash salary, this does not reduce the taxable value of the benefit. The full benefit must still be payrolled and taxed accordingly.
Why Employees Use Salary Sacrifice
Employees may choose to sacrifice pay to:
Access a benefit they might not otherwise afford
Gain potential NIC savings where permitted
Spread costs and access employer-subsidised schemes
The tax advantage depends on the HMRC treatment of the benefit. HMRC requires that the taxable value of the benefit be the higher of the salary sacrifice or the benefit’s actual value, ensuring fair taxation that reflects either the employee’s commitment or the employer’s contribution.
Important Considerations
Agreements must be fair and transparent: Employees should only sacrifice what is needed, and employers should not contribute too much or too little relative to the benefit’s value
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Salary sacrifice does not reduce the taxable element of a benefit: Salary Sacrifice is used to attain access to an otherwise unavailable benefit, and any contributions toward the taxable element must be made separately, from net pay, not gross, and cannot be made via salary sacrifice
Reference to contributions pertaining to generic employee contributions, or Capital Contributions toward Car Benefit
Interaction with the 50% tax rule: Salary sacrifice reduces cash pay, which can increase the likelihood of the 50% limit being triggered. Payroll teams should monitor cumulative deductions when employees participate in OpRA schemes.
Key Takeaways
Payrolling Benefits in Kind is not just an administrative change. It fundamentally shifts when and how employee tax is collected, improves compliance, and affects payroll operations.
Registration & Inclusion
Employers must register for each benefit via HMRC’s online service before the tax year
Employees can be excluded individually, but once registered, payrolling applies to the rest of the workforce
From April 2027, payrolling becomes mandatory for all eligible benefits
Communication Matters
Pre-tax year communication ensures employees understand the transition from P11D to payrolling
Post-tax year communication provides transparency on payrolled benefits, their cash equivalents, optional remuneration, and any non-payrolled benefits
Benefit Scope & Taxation
Only certain benefits can be payrolled; others (e.g., Living Accommodation, Interest-Free Loans) are excluded until HMRC allows
Each benefit may include multiple Event Types, which determine how the cash equivalent is calculated and when tax applies
Tax and NIC liability is determined by the cash equivalent, not the headline benefit value
Calculation & Adjustments
Payrolling spreads the annual cash equivalent across pay periods, but payroll must adjust for starters, leavers, mid-year changes, and corrections
Class 1A NIC is reported via P11D in 2026–2027; our BIK Module will automate this. Class 1 NIC must currently be handled manually, while a notional solution is developed
50% Tax Rule
Payroll must not deduct more than 50% of an employee’s cash pay in any period. Payrolled benefits increase the likelihood of hitting this limit, particularly when cash pay is low
Deferred tax is collected later if the 50% limit prevents deductions in a given period
Optional Remuneration / Salary Sacrifice
Salary sacrifice allows employees to exchange pay for a benefit, but does not reduce the taxable value of that benefit
Salary sacrifice arrangements can lower cash pay, increasing the chance of triggering the 50% tax rule
Capital contributions toward car benefits and generic employee contributions are separate from salary sacrifice and must be made from net pay to reduce the taxable value of a benefit
Operational Reality
Payrolling requires clean, accurate payroll data. It is operationally cleaner over a year than P11Ds, but less forgiving of errors
Systems and payroll teams must manage changes proactively, ensuring that HMRC reconciliations, tax calculations, and employee communications are accurate and timely
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