News

The UK government has announced that from April 2026, employers will be required to report and pay income tax and Class 1A National Insurance Contributions (NIC) on benefits-in-kind (BIK) via payroll software. This new mandate by HMRC aims to streamline the administrative process, simplify reporting, and enhance digitalization of tax payments related to employment benefits, effectively eliminating the need for approximately four million P11D returns and P11D(b) forms.

The Current System and Changes

Currently, employers report BIKs on forms P11D, and Class 1A NIC on these benefits is separately reported and paid using form P11D(b). The shift to payrolling BIKs means that these benefits will be taxed in real-time through payroll, reducing the administrative burden on employers by integrating BIK taxation with regular payroll processes. This change will also mean that Class 1A NIC, which employers currently report and pay separately, will be incorporated into the payroll system.

Benefits of the New System

1. Administrative Efficiency: By consolidating the reporting and payment of BIK-related taxes and NIC through payroll software, employers can reduce the administrative workload associated with submitting multiple forms (P11D and P11D(b)). This integration simplifies the tax process and makes compliance more straightforward.
2. Real-time Taxation: Payrolling BIK ensures that taxes are calculated and paid in real time, reducing the lag between the provision of benefits and the corresponding tax payments. This can help employees better manage their financial planning by reflecting their tax liabilities more accurately within each pay period.
3. Reduction of Errors: Automating the process through payroll software minimizes the risk of errors in calculating and reporting BIK and NIC. The consistency of automated systems can lead to more accurate tax reporting.

Challenges and Considerations

Despite the potential benefits, the implementation of this new system comes with several complexities and challenges:

1. Complex BIK Calculations: Not all BIKs are straightforward to calculate on a pay period basis. Benefits such as employer-provided accommodation, beneficial loans, and emergency vehicles have more complex valuation rules. The ICAEW has highlighted the need for consultation to simplify these calculations before making payrolling mandatory.
2. Software Development and Testing: The start date of April 2026 does not leave much time for HMRC to draft detailed specifications, and for software developers to create, test, and implement the necessary changes to payroll systems. Employers and payroll providers will need clear and timely guidance to ensure a smooth transition.
3. Payment Deadlines for Class 1A NIC: Currently, it is unclear whether the due date for paying Class 1A NIC will change under the new system. Employers need clarity on this aspect to plan their cash flows and ensure compliance with the new requirements.

Stakeholder Consultation

Given the complexities involved, it is crucial that the government engages in thorough consultation with stakeholders, including employers, payroll providers, and tax professionals. This consultation should focus on:

• Simplifying BIK Calculations: Particularly for complex benefits, there needs to be a clear and simplified approach to calculating the value of BIKs that can be easily integrated into payroll systems.
• Implementation Timeline: Employers need adequate time to adapt their payroll systems and processes to the new requirements. Clear guidelines and phased implementation could help mitigate the challenges associated with such a significant change.
• Training and Support: HMRC should provide extensive training and support materials to help employers understand the new system and ensure compliance.

Conclusion

The move to mandate the reporting and paying of income tax and Class 1A NIC on benefits-in-kind via payroll from April 2026 represents a significant shift in how employment benefits are managed and taxed in the UK. While the change promises to reduce administrative burdens and enhance efficiency, it also introduces challenges that need careful planning and consultation. Employers, payroll providers, and HMRC will need to work collaboratively to ensure the new system is implemented smoothly and effectively, providing clear guidance and support to facilitate the transition.