Overview
When payrolling Benefits in Kind, it is important to understand that different benefits attract different tax and National Insurance liabilities. These are highlighted in our Supported Benefit Types article.
The correct treatment depends on the type of benefit and the applicable legislation. Employers remain responsible for ensuring that both Income Tax and National Insurance are handled correctly.
The BIK module enables employers to payroll benefits for Income Tax purposes from day one of the 2026/27 tax year. Income Tax is fully automated once a benefit is configured and applied to employees.
National Insurance is treated differently depending on whether the benefit attracts:
Class 1A NIC, which is an employer only annual liability, or
Class 1 NIC, which applies to both employer and employee and must be processed through payroll at the point the liability arises
During the initial release of the BIK module, Income Tax is fully automated once configured, Class 1A NIC is managed outside payroll with a dedicated year end solution (P11D(b)) to be delivered ahead of the 6 July 2027 deadline (This is changing from April 2027, see National Insurance Processing), and Class 1 NIC must be processed manually within payroll until automated functionality is introduced.
This article explains how the BIK Module applies Income Tax and National Insurance treatment and sets out best practice for maintaining compliance during the 2026/27 tax year.
Selecting the Correct Benefit and Event Type in the BIK Module
The BIK Module contains all supported benefits and associated event types, each preconfigured with the correct legislative treatment for Income Tax and National Insurance. This means that the system automatically knows whether a benefit is subject to payrolled or immediate Income Tax and whether it attracts Class 1A or Class 1 National Insurance.
Employers do not need to determine the treatment manually. However, it is essential to select the correct benefit and event type when applying a benefit to an employee, as this drives payroll calculations and reporting.
Once the correct benefit and event type are applied, the module ensures that:
Income Tax is applied correctly according to the timing of the liability
National Insurance is calculated or set up for manual processing as required
Employers remain responsible for verifying that:
The selected benefit and event type match the employee’s entitlement
The cash equivalent or taxable value is accurate
The resulting liabilities are processed correctly within payroll
For guidance on setting up benefits in the system, refer to the following articles: Configuring Company Benefits, which explains how to configure a company-level benefit and select the correct benefit and event type, and Supported Benefit Types & Event Types, which lists and defines each benefit and event type, including their associated Income Tax and National Insurance liabilities and whether they should be processed immediately or spread across the year.
Please Note: For 2026/27, the BIK Module is operated through our Payrolling Benefits Managed Service, which applies benefits on behalf of employers. Customers must use this service for the first year, which provides guidance and validation to help ensure the selected benefit and event type match the employee’s entitlement, the cash equivalent or taxable value is accurate, and the resulting liabilities are processed correctly, while the ultimate responsibility for the data remains with the employer.
The following sections provide best practice guidance for managing both Income Tax and National Insurance within the 2026/27 tax year.
Income Tax Processing
Income Tax is fully supported and automated in the BIK Module from the 2026/27 tax year. Once a benefit is applied through the module, no manual payroll action is required to calculate or deduct Income Tax.
The way Income Tax is applied depends on the timing of the liability for each benefit:
Payrolled Tax Liability: The taxable value of the benefit is spread across the tax year. Notional payments are applied each payroll, increasing taxable pay and calculating PAYE accordingly. This ensures tax is collected incrementally and consistently across the year.
Immediate Tax Liability: The full taxable value is applied in the next available payroll. A notional payment increases taxable pay in that period, and the full tax due is calculated and deducted in a single payroll.
In both cases, the BIK Module automatically handles the Income Tax calculation and application. Employers (and the Payrolling Benefits Managed Service) should ensure the cash equivalent values are accurate, as these values determine the correct tax deduction.
For a detailed overview of how the module applies benefits in payroll, including examples of both successful and exception scenarios, see How Payrolling Benefits Works – Happy & Unhappy Path Scenarios. To understand what this looks like in practice within payroll itself, refer to How Payrolled Benefits are Reflected in Payroll.
National Insurance Processing
National Insurance is treated differently from Income Tax and must be managed separately. How it is handled depends on whether the benefit attracts Class 1A NIC (employer only) or Class 1 NIC (employer and employee).
Class 1A National Insurance (Employer Only)
Class 1A NIC is an employer-only liability calculated on the taxable value of certain benefits. Under legislation, it is normally reported via the P11D(b) and paid by 6 July following the end of the tax year.
Please Note: From April 2027, Class 1A National Insurance will no longer be reported through the P11D(b) process and will instead be processed through payroll in real time, similar to Income Tax on benefits, with amounts reported via the Full Payment Submission and paid alongside other PAYE liabilities.
BIK Module & Payroll Module Handling
For the 2026/27 tax year, the BIK Module does not automatically calculate or submit Class 1A NIC. A dedicated year-end solution will be delivered in advance of the statutory 6 July 2027 deadline, ensuring employers can calculate, report, and pay Class 1A NIC via the P11D(b) as required.
In addition, the module will be updated in advance of the 2027/28 tax year to process Class 1A NIC in real time through payroll, as outlined above, with amounts reported via the Full Payment Submission (FPS) and paid alongside other PAYE liabilities. This phased approach ensures full compliance for 2026/27 while preparing for the legislative change in 2027.
Class 1 National Insurance (Employer & Employee)
Class 1 NIC applies to both the employer and the employee and must be calculated in the payroll at the point the liability arises. Unlike Class 1A, this liability cannot be spread across the tax year.
BIK Module & Payroll Module Handling
In the initial release of the BIK Module, Class 1 NIC is not automated. It must be processed manually within payroll until automated handling is introduced in a later enhancement phase.
Recommended Best Practice for Manual Processing
Create a National Insurance Only Payment Type – Calculates Class 1 NIC without applying Income Tax or other deductions.
Create an Offset Payment Type – Applies the same value as a negative payment to prevent the benefit being paid to the employee, while still triggering the NIC calculation.
Apply the Payment Types – Use the full cash equivalent of the benefit with the NIC-only payment type, then offset as necessary with the negative payment type.
When Not to Offset: If the benefit involves a genuine cash payment to the employee (e.g., Vouchers redeemable as cash being paid via payroll), the negative offset is not required. In this case, the employer can choose to bypass the BIK Module entirely and apply the payment directly through payroll as earnings. However, doing so means the “benefit” will not be recorded in the BIK Module for the employee. Alternatively, employers can still record the benefit in the BIK Module, allow Income Tax to be handled notionally, and apply the payment as NICable through payroll without using a negative offset. This approach ensures the benefit is tracked in the module while correctly calculating the employee and employer NIC.
Managed Service Support
The Payrolling Benefits Managed Service assists with selecting the correct event types, applying benefits, and calculating Class 1 NIC correctly. Customers must provide accurate data and remain responsible for verifying that employee entitlements, cash equivalents, and resulting liabilities are correct.
Key Takeaways
From April 2026, payrolling of benefits remains voluntary; however, the product will support employers who choose to payroll benefits.
From April 2027, payrolling of benefits becomes mandatory for all UK employers, with Income Tax and Class 1A National Insurance processed through payroll in real time.
For the 2026/27 tax year, the Payrolling Benefits Managed Service is mandatory (if registering to payroll benefits with the HMRC). The BIK Module will be operated by the Managed Service team, not directly by customers.
Employers remain responsible for ensuring that benefit selection, taxable values, and supporting data are accurate and complete before implementation.
A compliant year-end solution will be in place for Class 1A NIC reporting for 2026/27, ahead of the statutory deadline.
The system will be updated in advance of April 2027 to support the legislative change whereby Class 1A NIC is processed and reported via payroll and the Full Payment Submission.
The BIK Module provides structured recording, notional tax handling, and audit visibility, even where employers choose to process certain cash elements directly through payroll.
Final Position
This approach supports employers through the transition from voluntary to mandatory payrolling of benefits while maintaining compliance, clarity of responsibility, and operational control.
Accurate data provision and adherence to defined processes will be critical to ensuring payroll accuracy and avoiding corrective action.
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