My HGH
My HGH
What is changing?
From 6 April 2027, it will be mandatory for most employers to report and pay Income Tax and Class 1A National Insurance contributions (NICs) on benefits in kind (BiKs) in real time through payroll software, rather than reporting them retrospectively via P11D returns.
Why does this matter?
Historically, where benefits were reported via P11D after the end of the tax year, HMRC would collect the tax owed by adjusting the employee’s PAYE tax code for the following year.
This is the core of the double taxation risk: in the transition year (2027/28), employees could find themselves being taxed twice on the same benefit. Once through real-time payrolling of the current year’s BiK, and once through a historic tax code adjustment that was already set up to collect tax on the prior year’s P11D-reported benefit carried forward into the 2027/28 code.
This will only be an issue for 2027/28. After that the retrospective collection of tax on the BiK will fall away and tax will only be collected in real time.
What employers need to do now
To mitigate the risk of double taxation and ensure a smooth transition, employers should consider the following steps:
- Communicate with employees. Make sure employees understand that the way their benefits are taxed is changing. Employees who have been accustomed to seeing a reduced tax code that accounts for their BiKs will now see the benefit value added to their gross pay each period, with tax deducted at source. Without clear communication, this can cause confusion and concern about take-home pay. There is considerable cash flow risk to employees that will essentially see tax deducted twice in the 2027/28 tax year on BiKs.
- Ensure accurate benefit valuations. Under the new regime, employers must ensure that reported taxable values for BiKs are as accurate as possible during the year. An end-of-year process will be available to correct values that could not be determined in-year, but HMRC expects most BiKs to be reported accurately as the year progresses.
- Engage with HMRC’s interim guidance. HMRC has published detailed interim guidance and draft legislation to help employers prepare, and this is being updated regularly based on stakeholder feedback.
Class 1A NICs: a separate but related consideration
It is important to note that payrolling benefits through the FPS is primarily about collecting Income Tax in real time. Class 1A NICs remain an employer obligation and must still be reported. For the 2026/27 tax year, employers still need to submit a P11D(b) to report Class 1A NICs on all BiKs, including those that are payrolled.
Looking ahead
The move to mandatory payrolling is a significant modernisation of the UK’s employment tax system. HMRC estimates this change will stop four million people from having their Income Tax collected in arrears, meaning employees will pay the right tax at the right time.
While HMRC’s end-of-year reconciliation processes should eventually correct any tax overpayments, the cash flow impact on employees during the year, and the associated employee relations challenges, should not be underestimated.
We strongly recommend that employers begin preparing now by engaging with HMRC’s published guidance, testing their payroll systems, and reviewing employee benefit and tax code data in detail ahead of April 2027.
Need Help? Get In Touch!
Please get in contact with a member of our team if you wish to discuss any of this further.
