Payrolling Benefits in Kind: How to Replace P11D Forms 2026

What is payrolling of benefits in kind?

Payrolling is the process of taxing employee benefits in kind (BIK) through the PAYE payroll system in real time, rather than reporting them annually on form P11D and letting HMRC adjust the employee's tax code.

For most of the last decade, payrolling was voluntary. Employers who used it could avoid P11D forms for registered benefits. From 6 April 2026, HMRC made payrolling compulsory for most benefits. Employers who still rely on P11D forms for reportable benefits (other than the excluded categories) must transition.

Why the change?

HMRC's stated rationale is to align benefits taxation with the real-time information (RTI) reporting that governs payroll. Under the old P11D system:

• An employee received a benefit during 2025/26.
• The employer reported it on a P11D by 6 July 2026.
• HMRC adjusted the employee's tax code -- sometimes not until mid-2027.
• The employee could owe underpaid tax for up to 18 months after receiving the benefit.

Payrolling means the tax is collected at source during the year the benefit is received. This reduces the risk of underpayment and eliminates the lag in tax code adjustments.

How payrolling works

Monthly calculation

Each payroll period, the employer:

1. Calculates the BIK value for that period. For an annual benefit value of £4,800 (e.g. a standard company van benefit of £3,960 plus an add-on), the monthly amount is £4,800 / 12 = £400.

2. Adds the monthly BIK value to the employee's gross taxable pay for that period.

3. Calculates income tax and NI on the combined amount (salary + BIK). The tax collected via PAYE increases accordingly.

4. Reports through RTI as part of the Full Payment Submission (FPS).

The employee's payslip should show the benefits being payrolled so they can see what is being taxed.

Annual benefit values

Most BIK are calculated on an annual basis (company car BIK, van BIK, medical insurance, etc.) and then divided by the number of payroll periods. For a weekly paid employee receiving a £3,960 van benefit:

Monthly BIK: £3,960 / 12 = £330 added to gross taxable pay each month.

Averaging for variable benefits

Some benefits vary in value throughout the year -- for example, private medical insurance where the premium changes, or a benefit that an employee only has access to for part of the year. Employers can:

• Use an estimated annual value at the start of the year and adjust at year-end if the actual value differs.
• Apply the benefit value only for the periods when the benefit was actually available.

HMRC requires that if you use an estimated value, any underpayment is corrected by 19 April following the end of the tax year.

Which benefits can be payrolled?

Most benefits in kind qualify for payrolling under the mandatory regime:

• Company cars and car fuel benefit.
• Van benefit and van fuel benefit.
• Private medical insurance.
• Gym membership and sports facilities.
• Mobile phones (where it constitutes a taxable benefit).
• Vouchers and credit tokens.
• Non-cash awards and gifts above the trivial benefit limit.
• Assets placed at an employee's disposal.
• Travel expenses not covered by an exemption.

Excluded benefits -- still reported on P11D

Two categories of benefit are excluded from mandatory payrolling and must still be reported on form P11D:

1. Employer-provided loans

Low-interest or interest-free loans provided by an employer are a complex benefit that depends on the average loan balance outstanding and HMRC's official interest rate (currently 2.25% -- check current rate). The calculation can only be finalised after year-end once the exact loan balance throughout the year is known.

Loans are reportable on P11D and the beneficial loan benefit is not subject to payrolling.

Note: small beneficial loans below £10,000 in total at any point in the year are exempt from BIK altogether.

2. Living accommodation

Employer-provided living accommodation remains P11D-reportable due to the complex valuation rules (gross annual value, higher of method, additional benefit for high-value property). The calculation depends on the annual rental value and the cost of the property if above £75,000.

HMRC may extend payrolling to these categories in future, but they are excluded for 2026/27.

Impact on employee tax codes

Before payrolling, HMRC typically reduced an employee's tax-free personal allowance by the BIK value to collect tax on benefits. For example, a basic employee with a £3,960 van benefit would have a tax code reflecting a reduced allowance -- HMRC collected the £792 extra tax (20% x £3,960) through a lower code.

Once payrolling is active:

• HMRC removes the BIK reduction from the tax code.
• The employee's code reverts to a "clean" code based on personal allowance and other deductions.
• Benefits are taxed directly through each payroll run.

Employees transitioning from P11D to payrolling in April 2026 may notice their tax code change -- typically an improvement in their code (higher free-pay allowance in their code) alongside the addition of BIK being processed directly.

Important: do not assume that because an employee's code has improved, they are paying less tax overall. The BIK tax is now embedded in the payroll calculation rather than via a reduced code.

Registering for payrolling -- the deadline

Employers should register with HMRC to payroll benefits before the start of the tax year. For 2026/27 this meant registering before 6 April 2026.

If you missed the pre-year registration, contact HMRC -- late registration may be possible but benefits processed under late registration may still need P11D reporting for part of the year.

Registration is done through HMRC's Online PAYE service (Government Gateway). Select "Register for payrolling employee benefits".

End-of-year obligations

With payrolling, individual P11D forms are eliminated for payrolled benefits. However:

• Employers still file P11D(b) to declare and pay the Class 1A NI liability on benefits. P11D(b) is due by 6 July following the end of the tax year, with payment by 22 July (19 July if paying by cheque).
• For excluded benefits (loans, living accommodation), individual P11D forms are still required.
• If you paid benefits in kind outside payrolling for any reason during the year, a P11D is still required for those.

Reconciliation and corrections

Where an employer used an estimated benefit value during the year and the actual value differs:

• An adjustment is processed in the final payroll period of the tax year.
• If the employee has left employment before the year-end, a P11D may be required for the adjustment.
• Over-taxed employees can reclaim through Self Assessment or via their 2026/27 tax code adjustment.

Communication with employees

Good practice before transitioning:

1. Notify employees in writing (or email) that BIK will be payrolled from April 2026 and explain how this affects their payslip.
2. Explain the tax code change -- their code may improve but they are not getting a tax cut.
3. Provide a worked example for any employees with significant BIK (company car, van, private medical) showing the before and after impact on take-home pay.

Checklist for employers

• Register with HMRC Online PAYE service for payrolling.
• Update payroll software to handle BIK in gross taxable pay.
• Calculate annual BIK values for each employee as at 6 April.
• Inform employees of the change and updated payslip format.
• Identify any excluded benefits (loans, accommodation) -- maintain P11D for these.
• File P11D(b) by 6 July 2027 for 2026/27 Class 1A NI.
• Pay Class 1A NI by 22 July 2027.

Sources

• HMRC: Payrolling: tax employees on benefits and expenses
• HMRC: Expenses and benefits for employers
• HMRC: Register to payroll benefits and expenses